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About IRENA
The International Renewable Energy Agency (IRENA) is an intergovernmental organisation that supports countries in their transition to a sustainable energy future, and serves as the principal platform for international co-operation, a centre of excellence, and a repository of policy, technology, resource and financial knowledge on renewable energy. IRENA promotes the widespread adoption and sustainable use of all forms of renewable energy, including bioenergy, geothermal, hydropower, ocean, solar and wind energy, in the pursuit of sustainable development, energy access, energy security and low-carbon economic growth and prosperity.
Acknowledgements
The report benefited from valuable comments and feedback provided by Tom Burrell (ACCESS), Daniel Schroth and Jeff Felten (African Development Bank), Michael Franz (Africa-EU Renewable Energy Cooperation Program), Marcus Wiemann and David Lecoque (Alliance for Rural Electrification), Nicola Bugatti (ECREEE), Peter Weston (Energy4Impact), Bozhil Kondev and Luis-Carlos Miro Baz (GIZ), Dipti Vaghela (HPNET), Madhusudhan Adhikari (Independent expert), Henning Wuester, Álvaro López-Peña, Arslan Khalid and Paul Komor (IRENA), Debajit Palit (TERI), Xavier Vallve (TTA) and Bikash Pandey (Winrock International).
The report also benefited from consultations conducted with Ibrahim Togola (Access), Giuseppe Buscaglia (Acra Lumama), Tom Price (All Power Labs), Ashok Chaudhuri (Ankur Scientific Energy Technologies Pvt. Ltd.), Mike Bergey (Bergey Windpower Co.), Rachel Child and Benjamin Hugues (Camco Clean Energy), Balthasar Klimbie (Clear Resource), Fabio De Pascale (Devergy), Mady Mbodji (ENERSA), Chris Service and Caroline Nijland (Foundation Rural Energy Services), Sandeep Giri (Gham Power), Sameer Nair (Gram Oorja), Leo Schiefermüller (JUMEME), Brian Shaad (Mera Gao Power), Vijay Bhaskar (Mlinda Foundation), Rajesh Manapat (OMC), Dipendra Bhattarai (Practical Action), Asma Huque (PSL/PGEL), Vivian Vendeirinho (RVE Sol), Rin Seyha (SME Renewable Energy Ltd), Didar Islam (SolarIC), Andy Schroeter (Sunlabob), Adrian Banie Lasimbang (Tonibung), and Stefan Gsänger (WWEA).
The report has been developed under the guidance of Rabia Ferroukhi and Salvatore Vinci (IRENA) and has been authored by Salvatore Vinci, Divyam Nagpal and Bishal Parajuli (IRENA); Nico Peterschmidt and Michael Rohrer (Inensus); and Chris Greacen (Independent consultant).
For further information: [email protected] This report is available for download from www.irena.org/publications Citation: IRENA (2016), Policies and regulations for private sector renewable energy mini-grids. International Renewable Energy Agency, Abu Dhabi
Disclaimer This publication and the material featured herein are provided “as is”, for informational purposes. All reasonable precautions have been taken by IRENA to verify the reliability of the material featured in this publication Neither IRENA nor any of its officials, agents, data or other third-party content providers or licensors provides any warranty, including as to the accuracy, completeness, or fitness for a particular purpose or use of such material, or regarding the non-infringement of third- party rights, and they accept no responsibility or liability with regard to the use of this publication and the material featured therein.
The information contained herein does not necessarily represent the views of the Members of IRENA, nor is it an endorsement of any project, product or service provider. The designations employed and the presentation of material herein do not imply the expression of any opinion on the part of IRENA concerning the legal status of any region, country, territory, city or area or of its authorities, or concerning the delimitation of frontiers or boundaries. Access to electricity is a central building block of socio-economic development. It empowers people and communities to increase their income and productivity, enhance their access to healthcare, water and education, and improves their overall well-being. Without universal access to modern energy services, achieving the Sustainable Development Goals set for 2030 will be nearly impossible. Extending power to everyone, especially at such a rapid pace required, cannot be done solely through national electricity grids. An estimated 60% of the additional power generation needed to achieve universal access must come from off-grid solutions. Most of these will involve mini-grids – isolated, community-level power grids, which can eventually be absorbed into the main grid or may continue to operate autonomously. In business terms, the case for either mini-grid or standalone systems to supply renewable power to underserved communities has never been stronger. Costs have fallen dramatically – over 80% since 2010 for solar photovoltaics (PV) – while technologies have continued improving. Adnan Z. Amin Renewable energy mini-grids have a proven track record of delivering cost-competitive Director-General electricity services in rural areas. Traditional deployment models led by public utilities, IRENA non-governmental organisations and communities, are being complemented with private sector approaches. From local entrepreneurs to large international utilities, interest in the development, financing and operation of mini-grids is growing. Policies and regulations for private sector renewable energy mini-grids aim to support policy makers in the design of enabling policy and regulatory frameworks. The report examines licencing, tariff regulation, risks related to main-grid arrival, and access to finance – the key factors investors in mini-grids consider. The report finds that mini-grid configurations respond differently to the policy and regulatory environment. It analyses the specificities for mini-grids based on solar, biomass, wind and small hydropower, or a combination of these with other energy sources. These should be fully understood to develop the right policy mix. This report comes as part of a broad stream of work by the International Renewable Energy Agency on how to expand energy access through the accelerated deployment of renewables. I am confident that it will inform policy making on mini-grid deployment and support the achievement of both electrification and development goals. A Renewable Energy Roadmap
CONTENTS
List of figures, tables and boxes ...... 4 Abbreviations ...... 6
EXECUTIVE SUMMARY ...... 7
INTRODUCTION...... 13 01 1.1 Traditional approaches to mini-grid development...... 15 1.2 Increased focus on the private sector...... 16 1.3 The development cycle for mini-grid policy and regulation...... 17
THE ROLE OF MINI-GRIDS IN RURAL ELECTRIFICATION...... 19 02 2.1 A multi-tier framework to classify electricity access...... 19 2.2 Renewable energy–based mini-grids and the multi-tier system...... 21 2.3 Deployment models for different combinations of technology and tier...... 21 2.4 Conclusion...... 46
POLICIES AND REGULATIONS TO SUPPORT . 03 PRIVATE SECTOR MINI-GRIDS ...... 49 3.1 Legal and licensing provisions...... 50 3.2 Cost-recovery and tariff regulation...... 54 3.3 Mitigating the risk posed by the arrival of the main grid...... 59 3.4 Policy measures to facilitate access to finance...... 65 3.5 Policy design for different combinations of technology and service tier...... 78 3.6 Conclusion...... 90
TRANSLATING RECOMMENDATIONS INTO . 04 POLICIES AND REGULATIONS...... 93 4.1 Classifying policy and regulatory measures...... 93 4.2 Implementation of policy recommendations through primary measures...... 95 4.3 Implementation of policy recommendations through secondary measures...... 98 4.4 Implementation of policy recommendations through tertiary measures ...... 101 4.5 Conclusion...... 103
References...... 104
3 POLICIES AND REGULATIONS FOR PRIVATE SECTOR RENEWABLE ENERGY MINI-GRIDS
LISTS OF FIGURES, TABLES AND BOXES
LIST OF FIGURES LIST OF TABLES
Figure 1.1 Meeting multiple Sustainable Development Table 2.1 Access to household electricity: Goals through renewable energy. . . . 13 A multi-tier matrix...... 20
Figure 1.2 Additional generation needed for universal Table 2.2 Selected solar DC mini-grid case electricity access by 2030 (by region and studies analysed in the report. . . . . 24 source)...... 14 Table 2.3 Selected solar and solar-hybrid AC mini-grid Figure 1.3 Policy development cycle for the case studies analysed in the report . . . 28 mini-grid sector ...... 17 Table 2.4 Selected biomass mini-grid case studies Figure 2.1 Components of deployment model analysed in the report...... 38 analysed...... 22 Table 2.5 A sample of wind-diesel hybrid Figure 2.2 Deployment model for solar DC mini-grids; mini-grids...... 43 tiers 1–3...... 23 Table 3.1 Measures to facilitate access to Figure 2.3 Major financing milestones for Mera Gao finance during project development. . . 67 Power...... 25 Table 3.2 Measures to facilitate access to Figure 2.4 Deployment model for solar/solar-hybrid finance during the proof-of-concept phase. 68 mini-grids; tiers 1–5...... 27 Table 3.3 Measures to facilitate access to Figure 2.5 Deployment model for hydro (run-of-river); finance during project rollout. . . . . 70 tiers 1–5...... 31 Table 3.4 Policy requirements for different Figure 2.6 Typical distribution of capital by source . .34 combinations of mini-grid technology and tier of electricity service . . . . . 90 Figure 2.7 Deployment model for biomass mini-grids; tiers 1–5...... 37 Table 4.1 Primary, secondary and tertiary measures to promote mini-grid deployment. . . .94 Figure 2.8 Deployment model for wind and wind-hybrid mini-grids; tiers 1–5. . . . 42 Table 4.2 Examples of policy decisions appearing in legislation...... 96 Figure 3.1 Regulatory approaches to protect mini-grid operators from losses in case of main-grid Table 4.3 Examples of taxation laws and regulations arrival...... 59 that support mini-grid development. . . . 100
Figure 3.2 Regulation options for main-grid connection Table 4.4 Selected examples of capacity building to the mini-grid (depending on generation initiatives...... 102 costs)...... 64
Figure 3.3 Examples of financing needs along the project-development chain ...... 65
Figure 3.4 Key risks for mini-grids...... 71
Figure 3.5 Illustration of effect of financial support on tariffs for a 300 kW solar-battery-diesel mini-grid...... 73
Figure 3.6 Illustration of UNESCAP's PPP approach. .76
Figure 3.7 Illustration of financing scheme in Nepal. .89
4 TABLES AND BOXES
LIST OF BOXES
Box 1.1 Why is private mini-grid development Box 3.8 Concession models in Mali, Senegal, being promoted?...... 15 and Madagascar...... 61
Box 2.1 The case of SOLshare in Bangladesh . . .22 Box 3.9 Connecting micro-hydro to the grid in Nepal and Tanzania...... 62 Box 2.2 Mapping the investment milestones in Mera Gao Power (India) ...... 25 Box 3.10 Interconnection options for mini-grids in Uttar Pradesh (India), Tanzania, and Rwanda. . 63 Box 2.3 Tying generation to domestic, commercial, and productive loads: The case of Box 3.11 Interconnecting mini-grids: Supplying solar-hybrid mini-grids in India. . . . .29 reliable electricity to underserved main-grid networks...... 64 Box 2.4 Revolving fund for micro-hydro: IDB-ITDG fund in Peru ...... 33 Box 3.12 The Sustainable Energy Fund for Africa (SEFA)...... 66 Box 2.5 Financing of micro-hydro plants in Sri Lanka...... 34 Box 3.13 Venture capital in the mini-grid sector . . 69
Box 2.6 Public-private partnerships: The case of a Box 3.14 Crowdfunding complementing traditional 120 kW micro-hydro system in Indonesia. .35 finance: The case of Mlinda and Mobile Solarkraftwerke Afrika...... 70 Box 2.7 The advantages of connecting mini-grids: The example of Nepal...... 36 Box 3.15 Channelling low-interest, local-currency debt for mini-grid projects...... 72 Box 2.8 Biomass gasification-based electrification in Bihar (India)...... 38 Box 3.16 General design principles for subsidies. . 74
Box 2.9 Direct combustion of biomass in an island grid: Box 3.17 The Guided Idea Competition: A new The case of Mafia Island in Tanzania. . . 39 approach to awarding grants in mini-grids. 75
Box 2.10 Biomass-to-electricity conversion processes. 40 Box 3.18 ESCAP’s pro-poor public-private partnership approach...... 76 Box 2.11 Risk-mitigation strategies for biogasification: The case of Novis in Senegal . . . . . 41 Box 3.19 Scaling up investments in isolated renewable energy–based mini-grid Box 2.12 Small wind-solar hybrid energy systems systems in Colombia ...... 77 in India...... 43 Box 3.20 Incentives for decentralised wind Box 2.13 Community-operated wind-hybrid systems development...... 82 in Nepal and Malawi...... 44 Box 3.21 Online resource assessment tools Box 2.14 Brownfield integration of wind: The case for prefeasibility analysis: IRENA’s of Phu Quy Island, Vietnam . . . . . 45 Global Atlas...... 83
Box 3.1 Key policy and regulatory conditions for Box 3.22 Twenty-two micro-hydro power plants private sector participation...... 49 leased to private developers in Rwanda . .86
Box 3.2 Addressing market information barriers . .50 Box 3.23 The benefits of integrating an isolated small-hydro project upon arrival Box 3.3 The role of institutions responsible for rural of the main grid ...... 88 electrification...... 51 Box 3.24 A debt fund for micro-hydro projects: Box 3.4 Non-electricity sector permits in Zimbabwe. .52 EnDev Nepal ...... 89 Box 3.5 Improving licensing procedures for Box 4.1 Environmental, health and safety regulations mini-grids...... 53 for small power producers in Thailand . . 99 Box 3.6 Tariff calculation using the Box 4.2 Creation of a favorable investment climate cost-plus approach ...... 58 in Tanzania...... 99 Box 3.7 Rural electrification master plans and Box 4.3 Harnessing the cross-sector development the national development agenda. . . .60 opportunity...... 103
5 POLICIES AND REGULATIONS FOR PRIVATE SECTOR RENEWABLE ENERGY MINI-GRIDS
ABBREVIATIONS
AC Alternating current MW Megawatt
AEPC Alternate Energy Promotion Centre NERC Nigerian Electricity Regulatory (Nepal) Commission
ARE Alliance for Rural Electrification O&M Operation & maintenance
BOOM Build, own, operate and maintain PPA Power purchase agreement
BOM Build, operate and maintain PPP Public private partnerships
CAPEX Capital expenditure PV Photovoltaic
DC Direct current REA Rural electrification agency
EIA Environmental impact assessment RERA Regional Electricity Regulators Association ESIA Environmental and social impact assessment RURA Rwanda Utilities Regulatory Authority
ESMAP Energy Sector Management Assistance SDG Sustainable Development Goal Program SE4All Sustainable Energy for All EUEI PDF EU Energy Initiative Partnership Dialogue Facility SHS Solar home system
EWURA Energy and Water Utilities Regulatory TA Technical assistance Authority (Tanzania) TEDAP Tanzania Energy Development and GIZ Deutsche Gesellschaft für Access Project Internationale Zusammenarbeit UPERC Uttar Pradesh Electricity Regulatory IDCOL Infrastructure Development Company Commission Ltd. (Bangladesh) UPNEDA Uttar Pradesh New and Renewable IPP Independent power producer Energy Development Agency kW Kilowatt USD US dollars kWh Kilowatt-hour VAT Value added tax
MNRE Ministry of New and Renewable Energy (India)
6 EXECUTIVE SUMMARY
EXECUTIVE SUMMARY
Off-grid renewable energy solutions will be Governments have an important role in key to achieve universal access to electricity. facilitating private sector participation. Mini- Rapidly decreasing technology costs, increasing grid development is closely tied to national policy reliability, and a growing track record of deployment decisions and regulatory frameworks. Supporting has strengthened the case for accelerated adoption of mini-grids requires an adaptation of the power system stand-alone and mini-grid solutions. Off-grid solutions framework, traditionally based on a centralised are estimated to supply nearly 60% of the additional model. Mini-grid solutions are diverse, and so are generation needed to achieve universal access; mini- the accompanying business and financing models. In grids will account for the majority. recognition of these specificities, a number of countries have turned to dedicated policies and regulations that Renewable energy mini-grids tap into locally cater specifically to mini-grid development. available resources to deliver electricity services. Relying on a single energy source (e.g., solar, wind, hydro, biomass) or a combination (e.g., solar- KEY POLICY AND REGULATORY CONDITIONS diesel hybrids), mini-grids provide varying electricity FOR PRIVATE SECTOR MINI-GRIDS service levels (or tiers). Traditionally, government The policy and regulatory landscape for mini-grids is agencies, state-owned utilities, community groups, highly dynamic as governments introduce dedicated nongovernmental organisations, and, in some cases, measures, gain experience and incorporate learning local private firms have driven mini-grid development. towards a more effective framework for mini-grid While successful in bringing electricity to a large development. This is essential to successfully adapt number of areas, limited economic sustainability and to local conditions and address deployment barriers. scalability have remained key challenges for growth. Recent developments point to some general policy and regulatory conditions related to legal provisions, Private sector involvement will accelerate tariff regulation, main grid arrival and financing, to growth in mini-grid deployment. From local support private sector mini-grids. entrepreneurs to large international utilities, there is growing interest from the private sector in the LEGAL AND LICENSING PROVISIONS development, financing, operation and management of mini-grids. Combining technology with new The private sector must have the legal right business and financing models, the private sector to generate, distribute and sell electricity to is deploying mini-grid solutions utilising diverse consumers. Obtaining the required licenses and financing options. permits can be a lengthy, risky and costly process, at
7 POLICIES AND REGULATIONS FOR PRIVATE SECTOR RENEWABLE ENERGY MINI-GRIDS
times exceeding 10% of a project’s capital costs. As a awarded for large areas through tendering, whereas general guideline, fees and other development costs provisional licenses are more suitable for bottom-up should not exceed 1–2% of the total cost of a project. mini-grid development. Although there is no single ‘right way’ to design an enabling legal and licensing environment, some COST RECOVERY AND TARIFF REGULATION general principles should be followed. Tariff regulation has a strong influence on the Clear processes and procedures are needed viability and sustainability of mini-grids, notably to reduce barriers to market entry. A common by affecting the operators’ ability to set end-user tariffs. approach to facilitate mini-grid licensing and other This affects project cash flows, the availability of funds regulatory requirements is to establish a single-window for management, operation and maintenance, and cost clearance facility hosted at a rural electrification agency recovery. Expectations of cost-recovery vary. Typically, or similar body. The Indian state of Uttar Pradesh, grant-financed systems require tariffs to cover at least for example, has established a one-stop shop for all management, operation, and maintenance costs, while mini-grid projects at the New and Renewable Energy private operators strive to also cover capital costs plus Development Agency). Coordinating stakeholders, a risk-equivalent return. managing the approval process, facilitating capacity Cost-covering tariffs are one way of ensuring building, and administering financial incentive schemes economic viability for private sector mini- can significantly reduce transaction costs. Information grids. Mini-grid tariffs tend to be higher than those for on processes and procedures should be easily the main-grid – this disparity is often viewed through accessible (e.g., Tanzania’s online information portal, the lens of equality and fairness between rural and minigrids.go.tz). urban consumers. In this light, some countries impose Streamlined regulatory requirements can national uniform tariffs (or keep mini-grid tariffs close reduce development costs. Regulatory to those of the main-grid), that are usually too low to requirements need to strike a balance between ensuring allow sustainable mini-grid operation. With decreasing that the actors participating in the market are reliable and costs of renewables, the case for differentiated tariffs compliance is affordable. A segmented approach linked has strengthened. Mini-grid solutions are increasingly to mini-grid sizes and technology is increasingly common. competitive compared to the cost of grid extension and In Tanzania, for example, mini-grids with a capacity of current expenditures on conventional energy. Add to less than 1 MW need not apply for a generation license. this the social cost of no electricity access. The Southern Simplified registration for mini-grids, solely for information Africa Electricity Regulators Association emphasises purposes, are also used in some countries. Non-energy that mini-grid tariffs be high enough to cover costs requirements, such as environmental impact assessments, (thus invariably higher than main grids), and structured can be simplified and standardised for projects. to reflect current spending on energy. It recommends Provisional licenses and concessions can that authorities provide provisions for communities to mitigate project-development risks. These appeal, without directly regulating tariffs. In Tanzania, measures help avoid two or more developers carry tariffs are reviewed if 15% of the consumers appeal. In out preparatory activities on the same site. Provisional Rwanda, comparison between mini-grid and main-grid licenses provide exclusivity for a few years, while tariff is not a valid cause for review. concessions grant a private entity the exclusive right A tailored approach to tariff regulation is to build, operate, and maintain assets to supply effective for catalysing private sector mini- electricity in a specific area for a defined time (e.g., grid development. Increasingly, small-scale systems 15 years) and service quality. Holding a concession (e.g., under 100 kW in Tanzania and Nigeria) are being typically comes with preferential tariff arrangements exempted from tariff approvals, allowing operators to and financial incentives. Concessions are usually set tariffs in consultation with the communities. Under
8 EXECUTIVE SUMMARY
these circumstances, project developers can test flexible as population density, productive loads (telecom tariff structures in a light-handed regulatory space. At towers, mines, etc.) and existence of other licensees, the same time, regulatory agencies save resources can inform decision making. Kenya’s National Energy and time. As systems become larger, operators prefer and Petroleum Policy (2015), for instance, provides some form of official tariff approval to mitigate the the basis for the development of a comprehensive risk of future tariff disputes. In this case, regulators are electrification strategy towards universal access by advised to standardise and define, to the greatest extent 2020. Generally, non-transparency, uncertainty in possible, the tariff setting methodology. funding and coordination issues pose challenges to Tariff caps and standardised tariff-calculation developing and following a coherent master plan. methodologies as elements of an enabling If defined ahead of time, interconnection approach to tariff setting. Caps limit tariffs to a and/or compensation mechanisms allay certain maximum, with the operator free to apply any risks associated with main grid arrival. When tariff up to that level. Caps should be set accounting the main grid reaches a mini-grid before its assets for local conditions (e.g., the technology used, village have been amortised, two main choices could be area, capacity). In some cases, tariff caps are applied by presented: the mini-grid may be connected to the financing institutions such as in Bangladesh. Although main grid (subject to technical compatibility) and/ a step in the right direction, tariff caps do not protect or the operator may be compensated. In the case of operators completely from local tariff disputes as interconnection, the mini-grid operator may sell its they only indicate an upper limit. Tariff determination electricity in bulk to the grid (converting into a small through standardised methodologies (e.g., a cost- power producer); it may supply its customers with plus approach) allows for systematic assessment and electricity bought from the national grid (making approval by regulators, and provides the basis for brief it a small power distributor); or it may provide tail- negotiations. Countries, such as Senegal and Nigeria, end support, running in ‘island mode’ when the grid are using cluster approaches (determining tariff caps by is down. In Cambodia, 250, formerly isolated diesel applying the cost-plus approach to groups of mini-grids) mini-grids, small power distributors are licensed by and information technology to minimise tariff approval the Electricity Authority of Cambodia. Operators may costs. Policy makers are encouraged to identify the most also be compensated for the residual value of the suitable tariff-determination approach in consultation mini-grid assets rendered uncompetitive by the main with local stakeholders and to formalise its adoption. grid, as is the case in Rwanda and Tanzania, where regulators assign a depreciation scenario for fixed MITIGATING THE RISK POSED BY THE assets. To ensure the success of either mechanism, full UNEXPECTED ARRIVAL OF THE MAIN GRID information about the applicable tariffs, depreciation Unexpected arrival of the main-grid is a major scenarios, and other matters should be available risk faced by mini-grid operators. Encroachment ahead of time to allow proper planning (financial and of the main grid can siphon off customers and strand otherwise). investments. The risk is particularly acute in the years before the mini-grid is fully amortised. The absence of, POLICY MEASURES TO FACILITATE ACCESS or lack of adherence to, grid-extension plans makes it TO FINANCE difficult to internalize the risk in the preparatory and Private mini-grids pass through different project-development phase of mini-grids. phases with varying financing needs. Rural electrification master plans provide Governments can take several measures to facilitate valuable guidance to public authorities and access to equity, debt and grant financing for mini- private mini-grid developers. Information on the grids. During the project-development phase, equity location and timeframe for grid extension, as well and grants can be attracted by improving access
9 POLICIES AND REGULATIONS FOR PRIVATE SECTOR RENEWABLE ENERGY MINI-GRIDS
to information needed to perform initial market of the total cost, with the remainder expected to come assessments and by cooperating with regional and as private investments and in-kind contributions from global funding facilities to attract early-stage grants. communities. In 2015, Rwanda was awarded a USD 840 000 grant A portfolio of financing instruments and by the Sustainable Energy Fund for Africa to co- innovative delivery models can catalyse finance feasibility studies of 20 micro-hydro sites, as private investments. Instruments, such as well as rollout and implementation plans that include subordinated debt and third-party collateralization, tariff and business models for mini-grids. Easy when tailored to the sector could make it easier to repatriation of funds and low withholding tax and attract debt and equity investors. Central banks, for indexation of tariffs to key variables (e.g., diesel price, instance, can set up subordinated debt facilities at foreign exchange rate, inflation) help attract investors low interest rates and with long tenures. Examples of for follow-on phases. To tackle specific financing such structures are the Micro, Small and Medium Size gaps (e.g., access to debt), dedicated funds can Enterprise Development Fund of the Central Bank of be established that pool together public and donor Nigeria, and Nepal’s Himalayan Bank and the Clean finance and guarantee tools can be used to leverage Energy Development Bank. Traditional infrastructure private capital. Local commercial banks can be development models, such as public-private engaged to make available low-cost, local-currency partnerships, can also be applied to reduce risks loans. An example is the Inter-American Development and enhance project bankability. To promote public- Bank’s USD 9.3 million programme implemented by private partnerships, the Rwandan government leased Bancoldex, a commercial bank in Colombia that aims 22 micro-hydro projects to be developed or upgraded to deliver long-term concessional financing for private and managed by private sector for 25 years. entities engaged in mini-grid development. Efficient design and delivery of public financial POLICIES FOR VARIOUS COMBINATIONS support is paramount for market development. OF TECHNOLOGY AND SERVICE TIER Grants, a widely used form of financial support, should Tailored mini-grid policies and regulations be carefully designed to ensure project sustainability can allow investment streams to be directed over the lifetime. Ongoing support is perceived as into certain combinations of technology and risky, given unforeseeable changes in policy and tier. Policies can influence not only the pace of rural underfunded budgets. For this reason, support electrification, but also the level of access, public towards capital expenditures is generally preferred, spending, and, to some extent, customer satisfaction. but this should not reduce the operators’ incentive All these aspects are related, such that improvements in to ensure long-term operation. Moreover, grants for one may come at the expense of another. For instance, generating assets may lead to sharp increases in end- a policy focus on solar DC mini-grids will result in fast- user tariffs when system capacity is expanded. paced electrification with low government spending, Grants may be delivered on a step-by-step basis (with but a relatively low level of electricity service. In developers seeking grants at the end of each project contrast, a policy focus on micro-hydro would yield a phase) or integrated into a single process (wherein higher level of service, but at a slower pace. The right the support linked to a phase is unlocked upon policy mix can optimise development of the mini-grid achievement of the preceding phase). The Guided sector, but an understanding of how policies affect Idea Competition approach implemented by the different technology-tier combinations is essential. Nigerian Energy Support Programme is an example of the latter. In general, financial support should be Various mini-grid configurations respond designed to leverage capital from commercial financial differently to the policy and regulatory institutions. Nepal’s Renewable Energy Subsidy Policy, environment. Solar DC mini-grids, for instance, for instance, is designed to cover approximately 40% are highly modular, low-capacity systems with
10 EXECUTIVE SUMMARY
predominantly movable assets and are, therefore, less susceptible than, say, small-hydro plants to main-grid encroachment. With fixed costs spread over fewer units of electricity, solar DC mini-grids are particularly sensitive to project development costs. On the operational-side, incentives targeting appliances could reduce costs and enhance the services available. Large mini-grids can benefit from de-risking measures, including power purchase agreements. Energy resource risks also vary: solar resources are better understood and more easily estimated than wind, biomass, or hydro. Targeted policy actions to mitigate this risk, such as siting and data gathering initiatives, would help diversify the portfolio of mini- grid solutions available.
TRANSLATING RECOMMENDATIONS INTO POLICIES AND REGULATIONS Mini-grid policies and regulations need to continuously be adapted to ensure effectiveness. The renewable energy mini-grid sector is highly dynamic and therefore policies evolve as they are introduced, applied and calibrated. Furthermore, to create enabling conditions for private mini-grid development, measures are needed in energy and non-energy sectors (e.g., financial, data and statistics, and rural development). This report provides examples of different measures, as a starting point for the development of a central repository of policy and other legal documents that can be easily accessed by sector stakeholders and policy makers. A well-designed policy and regulatory framework improves project sustainability and maximises socio-economic benefits. Access to electricity has substantial forward linkages for rural development, marked by considerable improvements in productivity, income, and livelihoods, all of which produce spill-over effects. In fact, renewable energy solutions have the potential to advance many Sustainable Development Goals. Given these interlinkages, policy makers are encouraged to examine the opportunities that mini-grid solutions offer for both electrification and other facets of sustainable development.
11 POLICIES AND REGULATIONS FOR PRIVATE SECTOR RENEWABLE ENERGY MINI-GRIDS
INTRODUCTION
12 INTRODUCTION
Access to modern energy services is now at the forefront Figure 1.1 Meeting multiple Sustainable Development of the development agenda. With their capacity to Goals through renewable energy transform livelihoods, modern energy services can improve incomes, education and health services, food and water security, employment, and gender equality (Figure 1.1). An estimated 1.1 billion people today live without access to electricity and are deprived of these opportunities. The Sustainable Development Goals (SDGs) propose to achieve universal access to electricity by 2030. To reach this goal, efforts will need to be redoubled; the traditional approach of extending the grid will not be enough. With demand outpacing capacity in most urban and semi- urban areas, extending the electrical grid to rural areas remains economically, technically or physically infeasible for most utilities. As a result, rural electrification is proceeding too slowly to address the deficit. In Sub- Saharan Africa, for example, the average electrification rate is around 17%; rapid population growth outpaces efforts to provide electricity (IEA, 2015; IEA, 2014). Decentralised solutions have recently gained prominence as cost-effective alternatives to traditional approaches. Solutions range from small-scale household systems to isolated mini-grids that service a few households or a village of several hundred houses as well as community centres and small businesses.
13 POLICIES AND REGULATIONS FOR PRIVATE SECTOR RENEWABLE ENERGY MINI-GRIDS
It is estimated that off-grid solutions will supply nearly or a combination of sources (e.g., solar-diesel hybrids), 60% of the additional generation needed to achieve with or without storage, mini-grids provide varying universal access (IEA, UNDP, and UNIDO, 2010); electricity service levels. “Micro-grids”1 and “pico- mini-grids are expected to supply most of the need grids” are mini-grids with generation capacity less than in Africa, developing Asia, and Latin America (Figure 10 kW. Mini-grids2 are often seen as a bridge solution 1.2). Advances in efficiency and reliability, together until the main grid arrives. In remote rural areas, they with sharp decreases in cost, mean that most mini- may be the most economical long-term solution. grids would be powered by renewable energy sources. With flexible sizing, resource utilisation, and Solar photovoltaic (PV) modules, for instance, cost management options, mini-grids are highly adaptable three-quarters less today than in 2009 (IRENA, 2015), to local conditions. Solar–based DC mini-grids can be making renewable energy–based mini-grid solutions used for basic lighting and mobile-phone charging; the most competitive option for expanding access in biomass mini-grids for powering electric appliances many rural areas. and motors in workshops and homes; and mini– hydro systems for providing grid-quality electricity. Because mini-grids rely on local resources and Figure 1.2 Additional generation needed for universal electricity access by 2030 (by region and source) networks to generate and supply electricity, technical management is less complex than for national utilities. 17% 19% 10% But owing to their limited generation capacity, mini- grids require greater Customer demand management and optimisation than main grids. 30% With an array of stakeholders engaged in the 40% deployment, operation and management, the track 44% record for mini-grid development is growing. The private sector is showing greater interest in the sector. By combining the cost reductions available through 60% renewable energy technologies with innovative models for finance and business, private players are unlocking 42% new markets to bring electricity to rural areas, working 37% alongside government efforts. The highly decentralised approach requires private entities —ranging from large consumer-goods conglomerates and private utilities to Africa Developing Asia Latin America local energy entrepreneurs —to participate in the rural On-grid Mini-grid Stand-alone energy sector, bolstering traditional efforts to expand access through mini-grids (Section 1.1). This chapter Sources: Based on IEA, UNDP, and UNIDO, 2010. analyses the rationale for increased focus on private sector involvement in the mini-grid sector (Section 1.2) Mini-grids have generation capacities from around 1 and describes the steps taken by governments in this kW up to 10 MW, supplying electricity to customers direction (Section 1.3). Finally, section 1.4 presents the who are off the national grid. Relying on a single objectives of this report and provides context for the energy source (e.g., solar, wind, hydro, biomass, diesel) development cycle of mini-grid policy and regulation.
1. In OECD countries, the term ‘micro-grid’ refers to a distribution and generation system, with generation capacities in the MW or hundreds of kW range, that can operate independently or in conjunction with the area's main electrical grid. These micro-grids are often installed to achieve exceptionally high levels of reliability for applications, such as data farms or industrial processes, for which a power outage could prove very costly. 2. Throughout this report, the term ‘mini-grid’ is used to refer to all forms of mini-grids, including micro- and pico-grids. Only when the distinction becomes relevant is further classification specified (e.g. micro-hydro).
14 INTRODUCTION
1.1 TRADITIONAL APPROACHES TO In the utility-driven model, tariffs set at national levels MINI-GRID DEVELOPMENT lead to mini-grid projects that are cross-subsidised by Electrification through mini-grids in developing grid-connected customers. With tariffs that do not countries has historically been driven by government cover costs, however, utility budgets become strained, agencies, state-owned utilities, cooperatives, worsening insolvency risks. Moreover, the cost of community groups, nongovernmental organisations, managing isolated systems is prohibitive given the and, in some cases, small, local private firms. high cost of operation and management of fossil-fuel Either by developing, managing, or operating new based mini-grids which are common. Utilities limit their systems, such entities managed to bring electricity involvement in building mini-grids, focusing instead to individual villages or a few households. Using on establishing more grid-based connections in urban grants and soft loans, governments and international or peri-urban areas, which have a higher return on development organisations have made large investment at lower additional costs of connection. investments in equipment; in-kind contributions from This negatively impacts the pace at which the main grid the beneficiaries have also played a role. Consumers expands to reach rural areas where consumption levels themselves have often paid minimal tariffs, leaving and ability to pay are low. A number of governments little financial resources for system expansion to meet are therefore taking measures to open up the rural growing demand. Limited economic sustainability electrification sector to private participation (Box 1.1). and scalability are major drawbacks to the traditional business models, which, in many cases, have involved communities and utilities. Box 1.1 Why is private mini-grid development being promoted? In the community-driven deployment model, tariffs generally are designed to cover only operations and THE INCREASING PACE OF ELECTRIFICATION maintenance (O&M) and sometimes reinvestment costs. Tariffs are almost always set too low, so only • Mini-grids are a decentralised solution that the most minimal management costs are recovered—a can be scaled up rapidly to expand access via situation worsened if management oversees multiple diverse, locally available renewable energy mini-grids in the same area. Without qualified oversight, resources. local operation often leads to early breakdowns of • The decentralised approach allows adaptation equipment, which creates the need for repairs earlier of mini-grid technology, operation, and than anticipated. As a consequence, maintenance management structures involving the costs are underestimated and community-run mini- private sector, local communities, and grids struggle with repairs. This makes the long-term nongovernmental organisations. operation of mini-grids nearly impossible without BETTER VALUE FOR MONEY funds to replace equipment or expand system capacity when needed. • Private investment in mini-grid development decreases pressures on public funds and in- Community-owned mini-grids have nevertheless creases scalability of interventions. Private been widely deployed and have a long track record, project development and innovative public- specifically with micro-hydro development (discussed private partnership models are both options. in detail in Section 2.3.3). To overcome the challenges described above, community groups can be integrated • With mini-grid development, governments into capacity-building programmes. These in turn and utilities are spared the cost of building can create strong local teams and structures able expensive medium-voltage lines to areas to undertake basic O&M and system management, with limited loads and avoid losses. including tariff collection and dispute resolution.
15 POLICIES AND REGULATIONS FOR PRIVATE SECTOR RENEWABLE ENERGY MINI-GRIDS
• greater business innovation in customer finance BALANCING PUBLIC UTILITY BUDGETS (e.g., pay-as-you-go) • Many utilities charge non-cost-covering • better customer-management technologies tariffs for grid electricity, an approach (e.g., mobile payment, remote monitoring, load that creates high debt and low operational management, and metering) budgets. When utilities are freed from having • more dedicated donor/public financial support to invest in and operate rural mini-grids, they programs for mini-grids can focus on expanding the national grid to improve electricity services in more densely • dedicated private sector policies and regulations, populated areas with a higher return on in some countries. investment. Governments play a key role in facilitating private RURAL DEVELOPMENT sector involvement in mini-grid development. Particularly important is the development of a pipeline • Mini-grids can be installed in remote of sustainable and, in some cases, commercially viable rural areas, allowing governments to projects with a reasonable risk-return profile. strike a balance between urban and rural development. Privately driven mini-grids lay Recognising the opportunity that mini-grids offer more emphasis on productive uses, building and the potential for private sector engagement, sustainability into the system, and boosting more countries have been introducing policies, and the socioeconomic benefits of access. regulations that support mini-grid development. Some recent examples are described below. 1. In March 2016, the Tanzania Energy and Water Utilities Regulatory Authority (EWURA) unveiled 1.2 INCREASED FOCUS ON THE its Development of Small Power Projects Rules PRIVATE SECTOR 2016, which laid out licensing and tariff regulation Private sector involvement in mini-grid deployment has requirements for mini-grids. Under the rules, very a number of advantages, chief among them access to small power producers (< 100 kW) are exempted financing and established management practices that from licensing or tariff regulation requirements. make it possible to deploy and maintain infrastructure The rules also provide clarity on the consequences assets over the long term. The private sector’s focus on of main grid arrival and offer a standard power customers, concern for cost optimisation, decentralised purchase agreement and a standard methodology decision-making, local presence, flexible management for computing tariffs for electricity fed into the main structures, real time pricing and innovative and grid (Tanzania EWURA, 2016). entrepreneurial thinking all contribute further to strong 2. In June 2016, India released its draft national and effective operations. policy on renewable energy–based mini-grids. The Mini-grid business models combining local expertise objectives include mainstreaming mini-grid solutions and decentralised management structures are already to improve access, streamlining project development available and have been proven through pilot projects in procedures, providing frameworks for operating several countries (IRENA, 2015). The track record of large- with local distribution companies, optimising access scale private mini-grid rollout, however, is rather limited—as to finance and fostering innovation in mini-grid rural electrification has only recently piqued private sector business models (India MNRE, 2016). interest by appearing to be potentially profitable. Recent 3. In 2015, the Rwanda Utilities Regulatory Authority interest is fuelled by a number of factors, among them: established a simplified regulatory framework to • the lower cost of renewables exmpt or expedite licensing for mini-grid projects. • more reliable technologies The regulation differentiates requirements for large,
16 INTRODUCTION
medium, small, and very small mini-grids, while also regulations, and support instruments. Step 5, the final providing greater clarity on tariff determination and step, involves the practical application of the policy and the consequences of grid arrival (RURA, 2015). regulation and the incorporation of field experience It is increasingly clear from these examples (and from into the development cycle. others not covered here) that to facilitate mini-grid Well-designed policies and regulations maximise development, a number of policy and regulation design the economic and social benefits of a project and elements must work in a concerted manner—notably make them sustainable. There is an inherent trade- those related to licensing, licensing, tariff regulation, main off, though. Given the diverse nature of deployment grid arrival risk mitigation and financial support. Mini- approaches, a one-size-fits-all policy approach can grid policies and regulations are developed in continual be ineffective in unleashing the full spectrum of processes that depend on successful adaptations to technological, management, and financing options. local conditions, including barriers to deployment. At the same time, policies and regulations cannot be customised to every conceivable combination of mini- 1.3 THE DEVELOPMENT CYCLE FOR MINI- grid technology, business model, and local conditions. GRID POLICY AND REGULATION Achieving the right balance requires an in-depth A typical development cycle for mini-grid policy and understanding of the specificities as well as the policy regulations (see Figure 1.3) begins with an analysis of and regulatory needs (or sensitivities) of different mini- current conditions—including the electrification rate, grid deployment models. Building on earlier analysis present laws and regulations, the characteristics of the (e.g. EUEI-PDF (2014), Tenenbaum et al. (2014)), as targeted rural areas (location, size, type of demand, well as IRENA’s work on the topic (e.g. IRENA, 2013 and and density), and constraints on private mini-grid 2015), this report is meant to support that effort by: implementation and operation. In a second step, the role 1. Presenting case studies of mini-grids to illustrate of mini-grids in achieving universal electricity access is their role in rural electrification strategy (Chapter 2); specified. The target level of electricity service and the 2. Analysing best practices in policy design, as well as generation and distribution technologies to be used are in the policy and regulatory needs of different mini- defined. In a third step, general and technology-specific grid technology solutions (Chapter 3); policy and regulatory needs are identified to inform 3. Showcasing measures that governments are taking to the design process. Step 4 translates the identified develop the policy and regulatory framework needed requirements into actual policies, master plans, laws, to scale up mini-grid deployment (Chapter 4).
Figure 1.3 Policy development cycle for the mini-grid sector
STEP 5 STEP 1 Practical application of the policy and Analysis of existing constraints and conditions regulatory framework • Electrification rate, renewable resources • Adjustment of administrative procedures • Current laws and regulation • New mini-grids built and operated • Rural community size, population density in villages, complexity of terrain • Private sector engagement in rural electrification
STEP 4 STEP 2 Introduction/adjustment of policy and Formulation of the role of mini-grids in rural regulatory framework electricity access • Electrification and renewable energy policy • Which tier of electricity service? • Rural electrification master plans • Which technology or combination of technologies? • Energy laws STEP 3 • Regulation Identification of general and technology-specific • Support mechanisms policy and regulation for private mini-grids • Solar DC • Biomass • Solar/solar-hybrid • Wind/wind-hybrid • Hydropower (run-of-river)
17 POLICIES AND REGULATIONS FOR PRIVATE SECTOR RENEWABLE ENERGY MINI-GRIDS
THE ROLE OF MINI-GRIDS IN RURAL ELECTRIFICATION
18 THE ROLE OF MINI-GRIDS IN RURAL ELECTRIFICATION
Mini-grids powered by renewable energy provide a From a socio-economic perspective, the benefits of wide range of electricity services in unconnected areas. electricity access are realised when reliable, cost- A growing track record of projects, falling costs, and effective, and sufficient electricity is available for a continued pressures to expand electricity access are range of uses, including productive uses. As the global compelling policy makers to mainstream mini-grids community convenes around the recently adopted within national rural electrification strategies. A first step Sustainable Development Goal 7 (SDG 7), defining in that direction is to understand what services mini- electricity access in terms of quantity and quality will grids can provide and the different technologies and be vital to meeting the development objectives. business models that are driving their deployment. This The Global Tracking Framework 2013 was the first chapter will analyse the multi-tier framework classifying of a series of reports on progress towards the three electricity access to show which mini-grid solutions can objectives of the Sustainable Energy for All (SE4All) deliver what type of access. Case studies will then be initiative. The framework introduced a comprehensive used to analyse the various deployment models. measurement and evaluation system that categorises access according to the quality and quantity of services 2.1 A MULTI-TIER FRAMEWORK TO customers can access.3 In this tiered framework, CLASSIFY ELECTRICITY ACCESS households fall into one of six different classes, Traditionally, governments have defined access in depending on the services offered (lighting, phone terms of the number of households that have electrical charging, television, fan, electric motors, etc.), as well connections or that live within a certain distance of as the peak capacity, duration of electricity supply, distribution infrastructure. Such definitions usually evening supply, affordability, legality, and quality. do not take into account service quantity and quality. These categories, their definitions and ranges, and the Many connected households are supplied with applicable technology are illustrated in Table 2.1. Some electricity for limited hours of the day (or night), and key features include: with low reliability (ESMAP, 2015). Until very recently, • Tier 0 describes non-existent or completely a common framework to classify electricity access has unreliable supply. Customers get less than four been lacking. As a consequence, definitions varied hours of electricity per day—and less than an hour greatly. in the evening.
3. Access pertains to usability of supply rather than actual use of energy (ESMAP, 2015).
19 POLICIES AND REGULATIONS FOR PRIVATE SECTOR RENEWABLE ENERGY MINI-GRIDS
• Tier 1 customers receive basic, reliable electricity for • Tier 3 allows for low-power appliances requiring at lighting and phone charging—at least one hour in least 200 W and provides more than eight hours the evening; electricity is available for at least four of electricity per day, or 50% of working hours for hours each day. productive users. • Tier 2 provides more than 50 W of power, enough • Tiers 4 and 5 supply electricity at near-grid or grid- to run televisions and fans. quality levels.
Table 2.1 Access to household electricity: A multi-tier matrix
Tier 0 Tier 1 Tier 2 Tier 3 Tier 4 Tier 5 Very low Medium Very high Low power High power Power4 power power power Min 50 W Min 800 W Min 3 W Min 200 W Min 2 kW And daily Min Min Min Min Min 12 Wh capacity 200 Wh 1.0 kWh 3.4 kWh 8.2 kWh Electrical lighting, Capacity Lighting of air 1,000 lumen- circulation, hours per Or services television, day and and phone phone charging charging are possible Hours per Min 4 hrs Min 4 hrs Min 8 hrs Min 16 hrs Min 23 hrs day Duration Hours per Min 1 hrs Min 2 hrs Min 3 hrs Min 4 hrs Min 4 hrs evening Max 3
ATTRIBUTES disruptions Max 14 per week of Reliability disruptions total per week duration < 2 hours Voltage problems do not Quality affect the use of desired appliances Cost of a standard consumption package of Affordability 365 kWh per annum is less than 5% of household income Bill is paid to utility, prepaid Legality card seller, or authorized representative Absence of past accidents Health and safety and low perception of risk in the future Source: Adapted from ESMAP, 2015.
The tier-based system describes the service levels because the few customers will not be consuming all experienced by customers, not the demand for the electricity generated. energy. So, for example, low-tier electrification in a Theoretically, almost any tier can be reached. But this well-developed area may result in unmet demand. By depends on the government (or a mini-grid developer/ the same token, a remote and undeveloped region operator) developing infrastructure, providing loans with high-tier electrification will be unprofitable for productive appliances, training customers on
4. The minimum power capacity ratings in watts are indicative, particularly for Tier 1 and Tier 2, as the efficiency of end-user appliances is critical to determining the real level of capacity, and thus the type of electricity services that can be performed.
20 THE ROLE OF MINI-GRIDS IN RURAL ELECTRIFICATION
electricity usage and business practices, and so forth. Technology choice can also be driven by other Setting the tier(s) for which the mini-grid framework exogenous factors—for example the uncertainty and will be designed is a strategic decision on the part of risk surrounding the arrival of the main grid, an event the government. At any chosen level, a well-designed that strands investments and diminishes consumer policy framework will deliver customer satisfaction at bases. As a hedge, some mini-grid developers deploy low tariffs, while keeping government expenditures as flexible, modular systems, generally based on solar PV, low as possible. which can quickly be assembled and disassembled, reducing losses when the main grid arrives. Others 2.2 RENEWABLE ENERGY–BASED MINI- build systems that comply with the national grid GRIDS AND THE MULTI-TIER SYSTEM standards. This enables the mini-grid operator to The Sustainable Energy For All (SE4All) multi-tier become a small power distributor that purchases system is technology-neutral (ESMAP, 2016). It does electricity at wholesale from the main grid when not distinguish among different sources of generation it arrives, an arrangement that would be subject to (solar, wind, hydro, fossil) or different distribution existing policy and regulations (see Chapter 3). Private options (grid, mini-grid, or stand-alone). A number mini-grids are using various deployment models and of configurations can be envisaged for mini-grids technologies, adapted to the local conditions, to that tap into one energy source or several to deliver deliver services across all tiers of electricity service. service at certain tiers. 2.3 DEPLOYMENT MODELS FOR As noted earlier, mini-grids can be designed for the DIFFERENT COMBINATIONS OF highest service tiers. The solution is closely tied, TECHNOLOGY AND TIER however, to (i) demand, (ii) available energy resources, and (iii) local conditions. In most unconnected This section describes typical deployment models for different technology-tier combinations using practical areas, the systems are designed to meet current examples and cases. The combinations presented and projected demand.5 Modular, flexible options here are known to be the common approaches for for electricity generation, such as solar photovoltaic renewable energy–based mini-grid electrification. In (PV), are considered the most suitable for household the case of hybrid systems, a portion of the electricity loads. Generating energy for the higher tiers and supplied may come from other generation technologies overcoming intermittency challenges requires storage (notably diesel generators) or from storage. or hybridisation with other energy options, such as diesel generators. Small-hydro can deliver high-tier The combinations analysed are as follows: service; it is typically the least costly option where • Solar direct current (DC)—tiers 1–3 water resources are available and sufficient demand • Solar and solar-hybrid alternating current (AC)— exists to amortise the investment. Similarly, biomass tiers 1– 5 is an attractive option in regions where there are abundant resources and sufficient demand. • Hydro (run-of-river) AC—tiers 1–5 Local demand heavily influences the choice of mini- • Biomass AC—tiers 1–5 grid technology. The existence of sufficient residential The deployment models for these combinations are load and commercial (or anchor) load (e.g., from analysed across the six components illustrated in rural industries, water pumps, and agro-processing Figure 2.1. For each combination, each component machinery) justify capital investments in assets that is analysed through case studies, stakeholder can provide higher tiers of electricity services. consultations, and a literature review.
5. Future demand is based on the number of households expecting to be connected, in addition to aspirational demand or growth in demand that may occur at a household level. The latter is often difficult to project with accuracy.
21 POLICIES AND REGULATIONS FOR PRIVATE SECTOR RENEWABLE ENERGY MINI-GRIDS
Figure 2.1 Components of deployment model analysed needed for sustainable SHS dissemination. Initiatives are in place to convert swarms of SHSs deployed in Ownership dense areas into a solar DC mini-grid (Box 2.1).
Site selection Box 2.1 The case of SOLshare in Bangladesh Financing Bangladesh hosts one of the most dynamic Technology markets for solar home systems (SHSs) in Operation & management the world, having deployed more than 4 million systems as of June 2016. The IDCOL Tari design and collection method SHS programme has, by all measures, been a tremendous success—providing electricity to more than 18 million people, or 11% of the 2.3.1 SOLAR DC (TIERS 1–3) population. The programme has helped to create Solar DC mini-grids typically have a capacity of less a sustainable local industry that has improved than 3 kWp and provide low to medium-tier services. the system’s long-term operational soundness. They cater to electricity loads at times of high demand Equally important, it has demonstrated that (evening) and integrate battery capacities ranging through financial innovation even the poorest from 1 to 30 kWh. Depending on the configuration of households can afford off-grid solutions. the system, access of up to tiers 2–3 can be provided. Collection efficiency, although decreasing, Service covers lighting, mobile charging, and low remains high at over 95% — a figure higher than power loads such as radios. Some solar DC mini-grids that of many banks in the developed world. are able to power TVs, stereos, sewing machines, and limited refrigeration and grain milling. From an end-user perspective, a key challenge is for the SHS to cope with increasing demand. In Direct current is preferred in such systems, where the current environment, either the household is electricity is distributed across short distances, gener- constrained by the existing SHS or has to secure ally only a few hundred meters from the generating another SHS (an inefficient option, with total plant (Palit and Malhotra, 2015), and efficiency losses capacity not necessarily increasing in linear fashion at the inverter (that is, in converting DC to AC) can with the addition of each new system). SOLshare, be avoided. Such mini-grids distribute electricity a private enterprise operating in Bangladesh, using DC from the battery at different voltages, which has developed a smart-village grid in Shariatpur, usually range from 12 to 120 V depending on the Bangladesh, that interconnects existing SHSs into network configuration and site details. Most DC grids a peer-to-peer electricity-trading network. This are set up as not readily compliant with the main grid, using house-to-house wiring or ground cabling that ingenious micro-grid allows users to both buy and can be easily removed when the main grid arrives. sell electricity, allowing those with a PV system to generate income, while those without one Solar DC mini-grids can be deployed rapidly and, given can access affordable electricity. In this manner, low installed capacities, with low capital costs. Within households are also able to maintain productive a broader rural electrification strategy, these mini- loads that would otherwise be impossible using grids deliver levels of service that could over-lap with their SHSs alone. SOLshare energy supply is those of solar home systems (SHSs). From a system provided in different packages through a flexible operation and management perspective, however, prepaid payment system, similar to pay-as-you-go there are differences between the approaches, methods for mobile phones. especially considering the range of ecosystem services
22 THE ROLE OF MINI-GRIDS IN RURAL ELECTRIFICATION
To gain a better understanding of the deployment • Devergy (Tanzania) is in early start-up phases. As model behind solar DC mini-grids, Figure 2.2 presents of May 2016, it had electrified 14 villages with solar an overview of the different components, with the DC mini-grids, with dozens more in the pipeline. remainder of the section analysing each of those in • Solaric (Bangladesh) provides electricity in about more detail. The analysis is based on the case of three private enterprises operating in the solar DC mini-grid 40 villages, connecting 40–50 customers in each. market segment: The three enterprises were selected for diversity across • Mera Gao Power (India) has more than two geography and electricity services (tiers) they provide thousand solar DC mini-grids each connecting (Table 2.2). The analysis is further strengthened with 30–50 customers. other cases from the literature.
Figure 2.2 Deployment model for solar DC mini-grids; tiers 1–3
Tier 0 Tier 1 Tier 2 Tier 3 Tier 4 Tier 5
Ownership Operation & management • Private, sometimes with a village ownership • Strong local presence of operator component, BOOM and BOM • Low cost overhead structure Site selection • Low cost logistics • Small villages with high population density • Intermittent operation with flat rates/load limiters, • Typically low income customers continuous operation with meters, mobile money • Clusters of villages to facilitate logistics Tari design and collection method • Strong customer training component • Flat weekly or appliance-based taris Financing • Pre-payment meters or load limiters • Mainly corporate finance, grants, possibly debt • Pay-as-you-go • CAPEX subsidies to reduce taris Technology • Low cost PV-battery <5 kW • Non main-grid compliant distribution networks - BOOM = build, own, operate, and maintain; Flat rates, load limiters or pre-paid meters BOM = build, operate, and maintain; • Highly ecient DC appliances CAPEX = capital expenditure.
23 POLICIES AND REGULATIONS FOR PRIVATE SECTOR RENEWABLE ENERGY MINI-GRIDS
Table 2.2 Selected solar DC mini-grid case studies analysed in the report
Enterprise Mera Gao Power Devergy Solaric Type For-profit social enterprise For-profit social enterprise For-profit social enterprise Country of India Tanzania Bangladesh operation Systems >2 000 Grids in 14 villages with more 40 implemented than 2 000 customers Technology Solar DC mini-grids connecting Solar DC mini-grids for 5–6 Solar DC mini-grids connecting 30–50 customers on 24V customers per networked 40 –50 customers on a 220V distribution with strong local tower on a 24V network DC distribution network presence of operator Tariff design Manual collection of flat-rate Prepayment meters with Mobile money collection (from and collection tariffs fully automated payment and head office to entrepreneur) method monitoring via mobile money and prepaid system (for end- users) Tiers covered 1 1–3, maximum 250W (time and 1–3 with a focus on 2 service level tariffs) Business Private sector with company Private sector with company Private operator approach model subsidies from international subsidies from international donors for accelerated rollout donors for accelerated roll-out Sector Unregulated Below 100 kW and therefore Unregulated for small systems; regulation categorised as a “very small new PPP approach wherein power producer” and exempt government provides funds from license and tariff review for public services (e.g., by the regulatory authority electrification of a hospital) to private operator
Ownership. Solar DC mini-grids are typically owned Site selection. Solar DC mini-grids are easily and operated by a private entity (sometimes includ- deployed in villages with high population densities. ing a village-ownership component) and amortised The system can be installed on the ground or a rooftop, through sales of electricity over a period of two or be distributed across multiple rooftops. As with to seven years. The model has been adopted by most mini-grids, sites farther away from the grid are developers such as Solaric in Bangladesh and Devergy preferred, as these avoid untimely main-grid arrival. in Tanzania. Mera Gao Power takes a micro-utility There have been cases, though, such as for Mera Gao approach when implementing its solar DC mini-grids. Power, when the systems have continued to operate The firm designs, installs, operates, maintains, and in villages where the grid has arrived but supply is provides the service to consumers for a fee or tariff unreliable. Local socio-economic conditions and (Palit and Malhotra, 2015), forming joint liability groups, evidence of community engagement also influence with all users of a given micro-grid acting as a group site selection. A minimum number of customers is to ensure timely collection. The ownership model may needed to justify initial investments. In the case of vary in other cases. Uttar Pradesh New and Renewable Devergy, for instance, which uses distributed, net- Energy Development Agency (UPNEDA), for instance, worked solar DC grids, four or five clustered houses installed more than 23 solar DC mini-grids in 2011–12 are required for the product to be technically and under a build, operate, and maintain model, wherein financially viable. Another important component in the technology providers install the micro-grids and site selection and development involves understand- then local operators run them. The local operators are ing what electricity services the community desires, paid a salary from the monthly user fee, and UPNEDA its willingness to pay, and local capacity to under- does the monitoring (Srivastava, 2013). take periodic O&M and collection. This is particularly
24 THE ROLE OF MINI-GRIDS IN RURAL ELECTRIFICATION
important for solar DC mini-grids, given their limited projects, and develop a track record to attract further generation capacity, as they are shared by at least 50 financing—a key challenge for many enterprises households. Therefore, community expectations need operating in this space. At present, enterprises rely to be carefully managed. mostly on equity and corporate-guaranteed debt Financing. An energy service approach is capital capital. Because these companies are typically small intensive. Solar DC mini-grid business models rely on enterprises, their ability to acquire on-balance-sheet a rapid scale-up. Short project-development cycles financing with corporate guarantees is limited. Early- and relatively low capital outlay for each project (any- stage grant financing plays a crucial role in building where between USD 1 000 to USD 10 000) mean that enterprise-level institutional capacity and during the enterprises can scale up rapidly, generate adequate scale-up stage, as evidenced by the case of Mera Gao cash flows, distribute fixed costs over a large number of Power (Box 2.2).
Box 2.2 Mapping the investment milestones in Mera Gao Power (India)
Mera Gao Power has secured financing at different stages. Grant funding from the U.S. Agency for International Development in 2011–2012 (USD 300 000) financed the first phase of scale-up and was crucial as the company sought to build institutional capacity. It also helped create a track record to attract further investment. In 2013, Mera Gao Power raised equity of about USD 1 million from Insitor Management, which helped Mera Gao Power reach 15 000 households by the end of 2013. As with most new business models, it took some trial and error. But with its new service geographies, Mera Gao Power raised additional funding from ICCO (USD 500 000 debt) and Engie, which helped it to expand to 22 000 households in 2015. Mera Gao Power has also tapped into crowdfunding raising, on one occasion, USD 30 000 debt with a 36-month term using SunFunder. Figure 2.3 presents an overview of the different components, with the remainder of the section analysing each in more detail.
Figure 2.3 Major financing milestones for Mera Gao Power
25 000 Engie debt ICCO debt Terra Watt price Insitor Impact fund debt 20 000 Milaap debt SunFunder debt Intellegrow debt 15 000
10 000 Creating track record, unlocking investments USAID DIV grant Number of households 5 000
0 2011 2012 2013 2014 2015
Source: Shaad, 2014.
25 POLICIES AND REGULATIONS FOR PRIVATE SECTOR RENEWABLE ENERGY MINI-GRIDS
Access to low-cost debt with flexible terms remains a meters into the mini-grid, allowing end-users to key barrier. Debt is important for rapid scale-up because pay for services beforehand. To reduce operational it comes at a lower cost than equity financing. Local and collection costs, the payment process has been commercial banks in most developing countries have yet integrated with mobile money platforms. Remote to fully grasp the investment opportunity that solar DC monitoring and load limiters also enable operators to mini-grids represent; they often require collateral, if they assess consumption and act on nonpaying consumers agree to lend at all.6 In Bangladesh, Solaric is facing this and those that are drawing too much power. On the challenge because banks will not accept solar DC mini- appliance side, highly efficient DC appliances are grid components as collateral . The collateral that young allowing end-users to watch television, refrigerate enterprises can provide is usually minimal; as a result, food, and use grain-grinding equipment, even on banks offer lower debt portions and less-attractive smaller mini-grids. Devergy equips households with conditions. An alternative to local commercial banks is meters that allow for real-time monitoring of usage international debt, if local regulations permit it. Currency and credits or consumption. Load monitoring helps risk could be a major challenge, although hedging7 may operators allocate power according to demand. In be a possibility. Solaric is able to benefit from available each village, a centralised Global System for Mobile hedging partners, owing to the high volumes of garment communication (GSM) unit communicates information exports from Bangladesh. through General Packet Radio Service (GPRS) about Technology. The mini-grid is a PV system tied to a mini-grid operations to a central server. battery pack, charge controller, and distribution network. Operation and management. As deployment The network itself is not, generally speaking, main-grid scales up, a key challenge is the post-installation compatible, but, otherwise, differences in configurations management of the mini-grids to ensure efficient can be seen across the three cases analysed. Devergy payment collection and reduce operational costs. A configures its mini-grid with distributed, networked solar combination of approaches has been adopted. First, PV; it has battery storage coupled with smart metering emphasis is placed on handing over day-to-day and a cloud-based monitoring system, thus minimising operation to a local operator and identifying clusters losses that would occur with centrally located generation of villages served by the same operational hubs and 24V distribution. In this manner, while many users that look after collection, monitoring, and servicing. in a typical village consume at tier 1, larger customers Second, regional technicians are notified of problems consume at tier 3, which powers appliances that include by mobile-enabled monitoring systems. Third, shifting refrigeration and grain-grinding equipment. Mera Gao to prepaid or pay-as-you-go tariff methods addresses Power distributes electricity through a 24V DC network concerns about nonpayment and better management serving tier 1, with each connection having two 1W of generation. LEDs and one mobile charging point. Solaric mini-grids Tariff design and collection method. Solar distribute at 220V, enabling customers to use televisions, DC mini-grids compete with conventional lighting laptops, satellite receivers, and so on (in other words, solutions such as kerosene and batteries. While tiers 2 and 3). lighting powered by electricity from mini-grids costs Innovation is growing on the metering and appliance far less than power from kerosene or batteries, tariffs side. Both Solaric and Devergy integrate prepaid must be cost-reflective and allow for a certain return if
6. Lack of safety standards for DC distribution are known to hinder financing of DC mini-grid projects. However, efforts are underway to address this challenge. For instance, the IEC/TS 62557 series (Recommendations for small renewable energy and hybrid systems for rural electrification) addresses many of the concerns and is being used by the World Bank Group's Lighting Africa initiative (together with UN SE4All). Additionally, the IEC 60364 series (Low voltage electrical installations) have been revised to include low voltage DC installations in buildings. 7. Hedging is a technique for reducing foreign exchange risk using the money market, the financial market in which highly liquid and short-term instruments such as Treasury bills, bankers’ acceptances, and commercial paper are traded.
26 THE ROLE OF MINI-GRIDS IN RURAL ELECTRIFICATION
the mini-grid is privately operated. At the same time, requires more expensive metering and monitoring the tariff must be tailored to the income patterns of systems. rural communities. Mera Gao Power charges a connection fee of INR 2.3.2 SOLAR AND SOLAR-HYBRID AC 8 50 (USD 0.75) and a prepaid weekly tariff of INR (TIERS 1–5) 25 (USD 0.37); the joint liability group made up of Solar and solar-hybrid (AC) mini-grids can deliver consumer households assures that the payment is higher-tier services than can solar DC mini-grids, made every week. The tariff is designed to deliver distributing electricity on a low- or medium-voltage AC a 15% return on investment over three years (Palit grid. In fact, they can reach up to Tier 5 but often stay and Malhotra, 2015). Devergy uses a time- and at tiers 3–4. Solar hybrid mini-grids may additionally service-level tariff and collects customer payments include a diesel generator to cover peak demand and via its mobile money technology and remotely switchable connections, reducing the need for a local to back up intermittent solar. These mini-grids are also presence but increasing the initial investment cost. well suited to cover the demand of larger productive There are pros and cons to both the flat monthly or users and small industrial loads such as mills, wood weekly model and the payment for time and service and metal shop machines, and telecom towers. With model. The fixed charge is a fairly simple method, demand and load management, operators can achieve but users get no information about the amount of proper daytime consumption of solar-generated energy they can use; as a consequence, users tend to electricity. The solar and solar-hybrid mini-grid market overwithdraw from the network. Payment for service segment is attracting more private project developers discourages excessive use, reduces commercial owing to the steep reductions in prices for PV modules losses, and addresses capacity constraints, but it also and a positive outlook for lower equipment costs.
Figure 2.4 Deployment model for solar/solar-hybrid mini-grids; tiers 1–5
Solar/solar-hybrid Tier 0 Tier 1 Tier 2 Tier 3 Tier 4 Tier 5
Ownership • Generator: mostly diesel, sometimes biomass or biofuel • Private, often public-private partnership or partly • Often main-grid compliant distribution networks subsidized model • Smart meters, pre-paid meters, sometimes load or Site selection load and time limiters • Small industries and other anchor loads Operation & management • Good productive use potential • Strong local presence of operator • High population density • Low cost overhead structure • Clusters of villages to facilitate logistics • Low cost logistics • Strong customer training component • Social theft and vandalism protection mechanisms • Areas with low risk of main-grid connection like split of assets Financing Tari design and collection method • Striving to acquire project finance • Regulated by authorities or through negotiations with • CAPEX subsidies to reduce taris the users Technology • Pay-as-you-go (PAYG) • Mostly main-grid quality 24/7 AC power • Pre-payment meters or load limiters, • Usually high renewable penetration with generator • Appliance-based taris as backup
8. USD 1 = INR 67.05
27 POLICIES AND REGULATIONS FOR PRIVATE SECTOR RENEWABLE ENERGY MINI-GRIDS
The three private enterprises analysed for this market systems and telecom towers as anchor loads. They segment are listed below and in Table 2.3. supply tiers 1–4 service to public, commercial, and • ACCESS SA (Mali) is a for-profit company with household customers close to telecom towers. Stand- 15-year concessions in 32 villages, of which 12 are alone mini-grids in India fall outside tariff regulations, operational; 9 of these are solar hybrid systems. so tariffs are decided mutually with consumers. The company uses 30–70% public finance; the • JUMEME (Tanzania) is a social business with the rest is private finance for initial investments. The installation of one 90 kW solar-diesel-battery system concessions protect from main-grid con-nection, under its belt. It plans to install about 25 systems although villages near the national grid are over the next two years. Financing is based on a susceptible to takeover by the national elec-tricity capital grant of about 50%; the remaining 50% will grid operator, EDM SA. If this happens, EDM is come through private finance, both equity and debt. to pay an agreed compensation to the company. Electricity is sold via prepaid meters and gives access Tariffs are adequately regulated. to household, community, commercial, and productive • OMC (India) has implemented approximately 100 users at tiers 3–5. At under 100 kW, the pilot system is systems through 2015 by using solar-battery-diesel exempted from regulatory tariff approval.
Table 2.3 Selected solar and solar-hybrid AC mini-grid case studies analysed in the report
Enterprise ACCESS OMC JUMEME Type For-profit private company For-profit private company Private social business
Country of Mali India Tanzania operation Systems >12 ~100 1 implemented Technology AC solar-diesel-battery hybrid AC solar-diesel-battery hybrid AC solar-diesel-battery hybrid
Tariff design Mixture of post and prepaid Prepayment metersw Prepayment meters and collection metering method Tiers covered Tiers 2–4 Tiers 1–4 Tiers 3–5
Business 30–70% public subsidy, 15-year Mostly telecom towers as anchor 50% grant mostly from ACP-EU, model concession customers, financing mostly 20% equity, 30% debt private
Sector Concessions and tariffs Stand-alone mini-grids in India Systems below 100 kW exempted regulation adequately regulated are outside tariff regulations, so from regulatory tariff approval tariffs are decided mutually with consumers
Ownership. The assessed solar mini-grid deployment Site selection. Site selection for solar and solar-hybrid models involve owning and operating a cluster of mini-grids depends on a range of factors. Local factors mini-grids. Clustering helps achieve economies of include the type of loads available (e.g., domestic, rural scale and reduces tariffs for end users. Amortization productive, commercial), ability and willingness of times depend on the business model and the terms people to pay, and projections of how the load might and conditions of the financing in place. evolve. Solar and solar-hybrid mini-grids are capable
28 THE ROLE OF MINI-GRIDS IN RURAL ELECTRIFICATION
of reaching high tiers of services, but if the electricity Power and Gram Power, uses telecom towers as anchor generated is not utilised, then viability is difficult. The loads while supplying power to rural communities presence of productive or anchor loads in (or around) (Bhattacharyya and Palit, 2016). Integration of solar the village, therefore, becomes an important deciding PV into existing diesel-powered mini-grids is an factor in site selection, as shown in the Indian case increasingly attractive way to reduce O&M costs, as described in Box 2.3. These loads could range from local demonstrated in Mali, where at least 30 hybrid mini- agro-equipment (e.g., milling machines, water pumps) grids exist. The World Bank recently funded a project to social infra-structure (e.g., rural health-care centres) to integrate solar PV into existing diesel-powered mini- to telecom towers. OMC, as well as others such as DESI grids in about 50 locations (Rai et al., 2016).
Box 2.3 Tying generation to domestic, commercial, and productive loads: The case of solar-hybrid mini-grids in India
In India the Mlinda Foundation has installed more than 270 pico- and micro-grids totalling 90kWp and serving approximately 1,900 homes, 365 small businesses, and 3 schools. Recently, it commissioned four solar-hybrid mini-grids in the Gumla district of Jharkhand covering 254 tribal households. Each mini-grid is powered by a solar PV array, inverter, and battery bank supplemented by diesel generator as backup for peak-load management. These systems are supplying energy for domestic, commercial (e.g., village shops and poultry units), and productive loads (e.g., farm loads like irrigation pumps and rice-hulling machines). At present, 46 farmers have switched from diesel-powered irrigation pumps and rice hullers to solar- powered electric machines. Round-the-clock electricity from the solar-powered mini-grids gives villagers the flexibility to pursue productive activities. The units power their farm-based productive loads and light their poultry coops through the night. The savings they accrue by eliminating kerosene and diesel increase their disposa-ble income, which they can further invest in energy-efficient devices.
Source: GSES, 2016.
Financing. Privately owned and financed solar/ Technology. Typically a solar mini-grid system solar-hybrid mini-grids require project financing consists of PV panels, an inverter, supervisory control, that features medium tenures and low interest rates. switchgear and protection equipment, batteries, and The financing demand for project development and a distribution network. Within hybrid power systems, equipment falls beneath a low double-digit million- diesel generator sets, or gensets, are dispatchable. They dollar range per cluster (e.g., 29 POLICIES AND REGULATIONS FOR PRIVATE SECTOR RENEWABLE ENERGY MINI-GRIDS has been observed to increase the life of batteries negotiations with the end users. This approach gives at similar LCOE or even lower. In the case of diesel operators the flexibility to design tariff schemes suited generation sets, oversizing shortens the life of the to a system’s cash flow and a community’s willingness engine. The higher rate of fuel consumption is also a to pay. The most common methods of tariff collection factor, as diesel generation sets need to run at 60– are pay-as-you-go, prepayment meters or load 80% capacity for optimal efficiency (Power Water, limiters, appliance-based tariffs, and fixed weekly or n.d.). Given the site-specific nature of the technology monthly tariffs. and the financial and technical implications of OMC has a prepaid system based on subscription, over- and undersizing, significant onsite data and where a rural consumer is charged a monthly rental optimization tools are required for system design. of USD 2. Gram Power has also adopted a prepaid With technological advancements, new systems credit model for tariff design and collection. Local are more energy efficient, with smart supply-load entrepreneurs purchase prepaid bulk energy credits management systems that are often main-grid from Gram Power, then wirelessly transfer the prepaid compliant. Automatic communication systems, recharge into consumers’ meters, again on a prepaid custom-made smart meters, and built-in load control basis. The meter also has the ability to indicate the all provide tailor-made solutions for customer billing quantum of load operable for certain hours. For and collection services. Earthspark International and instance, around USD 1 could purchase 200 hours Gram Power, for example, are using smart metering of compact fluorescent lighting or 50 hours of fan and pay-as-you-go and prepaid models to make their operation. Local entrepreneurs make a profit of around systems technically robust and financially attractive 10 percent on the overall sale of energy credits. In to the users. under-regulated environments, mini-grids may need Operation and management. Operators have a to set tariffs per kWh on a consumed-energy basis, strong local presence, often involving communities in in accordance with the national tariff or at a level set O&M to reduce costs and minimise downtimes. For through negoti-ations with the regulatory body (e.g., instance, Mlinda conducts dedicated trainings for local AMADER in Mali). Different models for tariff regulation technicians in the installation and operation of plants. are dis-cussed in greater detail in Section 3.1. Technology innovation can also play an important role in minimising costs associated with O&M, including 2.3.3 HYDRO (RUN-OF-RIVER) (TIERS 1–5) tariff collection. Remote monitoring, in particular, Small-scale hydropower plants are capable of supplying can allow operators to observe clusters of mini-grids electricity 24 hours a day for all different tiers at a cost and develop centralised O&M capacity to bring down that is less than that of most other renewable energy overhead, as well as transaction and logistics costs. In technologies. Depending on capacity, run-of-river some cases, community ownership of certain assets is hydropower systems are usually classified into pico- also preferred to protect against theft and vandalism. (< 1 kW), micro- (< 100 kW), and mini- (up to 1 MW). Tariff design and collection method. Various Pico- and micro-hydro systems feed into an isolated tariff models have already been tried for solar or solar grid to electrify remote rural areas, with possible hybrid mini-grid systems in different regions of the future connection to the main grid if and when it world. Tariff design mainly depends on a country’s arrives. Larger mini-hydro systems are developed in regulatory framework. In an unregulated market, the both isolated and grid-connected settings depending private sector identifies the site and then develops and on local loads and proximity to national grids. Both implements the projects, determining tariffs through micro- and mini-hydro systems have been deployed at 9. Classifications of pico-, micro-, and mini-hydro vary from context to context. There is also no standard classifica-tional distinction between small- and large-scale hydropower. Different countries adopt different thresholds, rang-ing from 5 MW to 50 MW (in China). 30 THE ROLE OF MINI-GRIDS IN RURAL ELECTRIFICATION scale in several countries, demonstrating what works faith-based organisations. Given the small scale, and and does not work. Micro-hydro development has often the remoteness, of micro-hydro systems, the been particularly strong in South and Southeast Asian private sector has yet to fully engage in segments countries, such as Nepal, Indonesia, Malaysia, Myanmar, other than equipment manufacturing, site preparation, and Sri Lanka, where systems of tens and hundreds of and installation. Much stronger engagement is seen in kWs capacity have been widely deployed to expand the mini-hydro space where the deployed capacity is electricity access. In Nepal, for instance, more than large enough to provide economies of scale and more 1,400 micro-hydro plants are in place, accounting for predictable cash flows. Such projects also often enjoy close to 25 MW of total capacity. The plants can vary policy support such as feed-in tariffs and power- from anywhere between 12 kW to 140 kW, with the purchase agreements (PPAs). average capacity of plants added between 2011 and Because much of the micro- and mini-hydro 2013 being 30 kW (World Bank, 2015). development takes places at a project-by-project In micro-hydro development, communities, in the level and because of the wide range of private actors form of cooperatives or community-based organisa- involved, this section deviates from the approach tions, are known to play an important role in project adopted for other technology-tier combinations, development, ownership, and operation. In fact, where selected cases are analysed. Instead, this most programmes are designed for communities to section addresses the different components of the have some form of ownership stake in the systems. micro- and mini-hydro deployment model while using Other private entities active in the sector include local specific cases as examples. These components are practitioners, nongovernmental organisations, and summarised in Figure 2.5. Figure 2.5 Deployment model for hydro (run-of-river); tiers 1–5 Tier 0 Tier 1 Tier 2 Tier 3 Tier 4 Tier 5 Ownership Operation & management • Strong community-ownership component with • High project development cost and long process growing private participation, especially for larger (ESIA, water rights, etc.) mini-hydro projects • 24/7 electricity supply Site selection • Often local management by community or by anchor • Excellent hydro potential throughout the year load owner for distribution and professional operator • High population in a region that can be covered with for generation a medium voltage grid Tari design and collection method Financing • Regulated by authorities or through negotiations with • Usually mainly grant funded with reserve accounts for the users turbine replacement and repair • Pay-as-you-go (PAYG) • Option for non-recourse project finance especially if a • Pre-payment meters or load limiters, large anchor customer is connected • Appliance-based taris Technology • Construction and turbine prepared to last >20 years • Main-grid compliant medium and low voltage distribution networks • Flatrates, load limiters or pre-paid meters • AC o-the-shelf appliances ESIA = environmental and social impact assessment. 31 POLICIES AND REGULATIONS FOR PRIVATE SECTOR RENEWABLE ENERGY MINI-GRIDS Ownership. Diverse ownership models are seen times simply abandoned in the absence of additional for micro- and mini-hydro development. A number investment to integrate with the grid.12 Third, private of nongovernmental entities, ranging from private sector involvement would allow of programmes enterprises to communities, are involved at different that currently depend on public financing from stages of project development. Eventually, ownership governments or development. Finally, successful usually rests with the communities alone or together markets (in Nepal, Indonesia, and Sri Lanka, for with a private entity (in a public-private partnership). example) have shown that, under the right conditions, The dominant role of community entities in the local turbine manufacturing can thrive and in turn ownership and O&M of micro- and mini-hydro plants drive deployment of small-hydro solutions. is considered a reasonably sustainable model that ensures continued operation among thousands of Site selection. Small-hydropower development communities globally. There are several reasons is highly sensitive to physical site characteristics, for this. First, communities see great value in the including seasonal water flow rates, head (pressure), social benefits arising from these projects, which are and the distance to load centres. The best geographical otherwise not financially attractive for the traditional areas are usually hilly or mountainous regions with private sector to invest in.10 Second, community a continuous flow of water throughout the year. projects have the benefit of building local capacity in Wherever these conditions prevail and nearby demand management and leadership. This capacity building is high, the hydro-powered mini-grid is preferred. is difficult to quantify. Nevertheless it remains clear Compared with other options (e.g., diesel, solar), it that communities that together build and operate is often the least costly way to expand electricity these projects also bond together. By building trust access (World Bank, 2015; ARE, 2014). Information in each other, community members strengthen the about resource availability and physical sites is rarely community’s collective ability to respond to adversity. available, however. Because of this, potential sites must This is vital for the sustainable operation of the small- be assessed individually, and each system designed hydro system, especially in the remotest of rural areas. for the local environment. Site selection, feasibility The community-ownership model is paving the way, studies, preparation, development (e.g., the design of moreover, for the private sector to play a greater weirs and penstocks), and installation are all resource role. A combination of factors is at work. First, intensive and have long lead times. The timeframe is community-owned systems developed under national also affected by regulatory requirements—the need and international programmes are financed primarily for licenses, for example, or environmental and social through grants or concessional public financing, impact assessments (discussed in detail in Chapter 3). with partial contributions from communities. There For instance, most countries set conditions, such as weir is limited technical capability at the community lev- height, that determine the regulatory requirements that el, and the financing structures (discussed later) projects must meet. These processes must be factored offer little incentive for community-owned systems into the site selection and system design. to maximise productive uses or increase the load Financing. Micro- and mini-hydro plants are largely factors.11 Tariffs are often set to recover the general financed by grants from government programmes or expenses, leaving little for additional investments through bilateral or multilateral development agencies, (e.g., unscheduled repairs). Second, if and when the corporate social responsibility (CSR) programmes, or main grid reaches, the small-hydro systems are many philanthropic organisations. The communities also 10. Social benefits are not limited to energy access alone. Community hydropower projects often also include a watershed-management component in which community members work together to protect against deforestation and farming practices that increase erosion. 11. Building social capital and mobilization comes at a cost—up to 30% of the project cost in the case of REDP in Nepal. 12. Important to note is that some community-owned projects in Sri Lanka and Indonesia are interconnected with the national grid (PUCSL 2013). 32 THE ROLE OF MINI-GRIDS IN RURAL ELECTRIFICATION contribute financially or through in-kind contributions The government, together with other stakeholders, is (e.g., labour, material). In Nepal, a survey of projects trying to reverse this trend. It has begun some projects supported by the Alternate Energy Promotion Centre with revolving funds that pool financial resources to (AEPC) showed that community support was nearly develop multiple micro-hydro projects. In some cases, a third of the total capital expenditure, with the rest the systems can be transferred for O&M to the local of the financing coming in the form of grants from communities on a lease-to-own basis, paying back the various sources, including a subsidy offered under cost of the system to the revolving fund, such as in a government-led programme (World Bank, 2015). Peru (Box 2.4). Box 2.4 Revolving fund for micro-hydro: IDB-ITDG fund in Peru In Northern Peru, more than 50 micro-hydro schemes have been deployed to provide electricity to around 5 000 families, averaging about 33 kW. About 40% of the cost of the micro-hydro scheme is paid by the community members, partly through a loan from the Inter-American Development Bank (IDB). Most schemes are run by a local management group, which sets a suitable tariff structure so that payments will cover O&M costs and loan repayment. A village micro-enterprise oversees the day-to-day O&M. The Micro Hydro Promotion Fund (MPF) was a revolving fund; IDB contributed USD 120 000 in 1992, followed by USD 300 000 in 2000. Generally, the MPF credit experience has been positive. Loans totalling USD 783,718 were made to partially finance the construction of 31 micro-hydro units up to January 2005. The MPF lent up to USD 50 000 per project (about 25–30% of the average investment cost), with a repayment period of up to five years. Average payback times were about three years, which results in high monthly instalments averaging about 13–14% of current municipal revenues. A longer repayment period substantially reduces the value of these instalments and reduces the risk of default. Source: Practical Action, 2005. The small size of micro-hydro projects, together with have self-financed community-owned projects, the higher risks associated with returns on capital allowing communities to repay capital costs from investments, has hindered commercial financing. tariff collection within about five years of commission- Some national programmes, as in Sri Lanka, have been ing. The technology has remained underdeveloped, able to leverage commercial financing for isolated, however, in order to keep costs low enough to allow micro-hydro projects (Box 2.5). The experience of rural communities to self-finance (HPNET, 2015). This Myanmar is also interesting. There, local practitioners is one drawback of the approach. 33 POLICIES AND REGULATIONS FOR PRIVATE SECTOR RENEWABLE ENERGY MINI-GRIDS Box 2.5 Financing of micro-hydro plants in Sri Lanka Most micro-hydro projects in Sri Lanka were supported by the Renewable Energy for Rural Economic Development (RERED) project funded by the World Bank’s International Development Association (IDA) and the Global Environment Facility (GEF). Until its culmination in 2012, the RERED project had helped deploy more than 173 projects with an aggregated capacity of about 1,748 kW. Plant capacities of the micro-hydro schemes range from 3 kW to 50 kW, with 17 to 116 consumers. A project is built, owned, and operated by a society formed by the village consumers, called the Electricity Consumer Society (ECS). The ECS acts either as a registered company or a cooperative to access loan funds from a participating credit institution (PCI) (mostly private commercial or development banks and finance companies). Subject to meeting the PCI’s assessment of creditworthiness, the ECS obtains medium- or long-term subloans from the PCI. Two special dollar accounts (SDAs) are maintained at the Central Bank of Sri Lanka to deposit the proceeds of IDA credit and GEF grant. The credit in the SDA is used to refinance PCIs, which approve subloans to project beneficiaries. As the PCI disburses funds against the approved subloan amount, a loan disbursement request form is forwarded by the PCI to obtain a maximum refinancing of 80% of the amount disbursed. Release of grant funds is based on evidence of work done. Technical assistance funds are available for a project facilitator (a consulting company) to assess the water source, produce technical designs, and develop a feasibility study and a bankable proposal. Typically, these companies support the community from inception to project commissioning. This mediation is crucial for a project to get off the ground, as there is limited capacity at the community-level to initiate projects. Figure 2.6 Typical distribution of capital by source 16% 10% 16% Village in-kind Equity contribution Co-financing grant Bank loan 32% Grant from provincial council 26% Source: DFCC, 2016. Mini-hydro projects have typically been financed Privately owned and financed mini-grids require project commercially; especially if they are backed by strong financing approaches with long tenures and low interest anchor loads and utility-backed PPAs, which make for rates in case no external collateral or guarantees more predictable cash flows, more bankable projects, are available. The financing demand for project and possible nonrecourse project financing. In Indonesia, development and equipment, per project site, typically for instance, feed-in tariffs are offered to mini-hydro falls beneath the single-digit million-dollar-range. projects (up to 10 MW) with operators signing PPAs with Export credit agencies are known to play a role in mini- the local utility (Baker and McKenzie, 2015). hydro project financing, helping equipment suppliers 34 THE ROLE OF MINI-GRIDS IN RURAL ELECTRIFICATION and developers source long-term concessionary credit IBEKA (a not-for profit social enterprise) develops micro- to deploy projects in developing countries. But privately and mini-hydro projects where low-income community financed mini-grids lead to higher electricity-generation members pay for electricity at the national tariff level costs than plants financed largely through grants (Box 2.6). The sales income (which must cover operating because the equity or debt needs to be paid back as well and maintenance costs) can be sufficient to attract as the administrative cost and the risk assumed by the private investment for a hydro plant—particularly from investors. Public-private partnership models are seen socially motivated investors who do not require a high to overcome this challenge. In Indonesia, for instance, financial return. Box 2.6 Public-private partnerships: The case of a 120 kW micro-hydro system in Indonesia Cinta Mekar, a 120 kW micro-hydro system, was developed through a public-private partnership. The total project cost was borne equally by three parties: a multilateral agency, a private company, and IBEKA. The plant is equally owned by the community and the private company. Mekar Sari Cooperative represents the community. The joint venture sells the electricity generated to PLN, the state-owned electricity company, under a power-purchase agreement at a fixed tariff (IESR, 2013). Technology. Small-scale hydro mini-grids are This means that, in addition to a robust resource generally designed to provide grid-quality AC assessment, community engagement is key. The power supply. The key components—waterway, system design process has to strike a balance between penstock, powerhouse (turbine, load controllers), how much power can be generated over a year and transformers, and transmission lines—all involve what the demand is and is projected to become. It is mature technologies. Although the technology is easy to quantify existing demand; projected demand available, a principal challenge is to adapt it to local is largely unknown. Experience, not just from Nepal conditions. Efforts are underway in some markets to but also from Indonesia and Malaysia, has shown localise the fabrication, development, and installation that in the short term, household demand increases of key components (e.g., electronic load controllers). substantially along with commercial loads (e.g., agro- Where it is likely that the main grid will arrive in the processing units of 7–12 kW) (World Bank, 2015). near future, or where feed-in incentives are available As a result, the plant cannot meet peak demand. In (e.g., Indonesia), additional investment could make addition, the capital subsidy in Nepal is designed for systems compatible with the grid. In most other cases, systems providing 100–200 W/household. The system especially for micro-hydro, the objective is to minimise is designed for those load conditions. So technol-ogy development costs as much as possible. options such as electronic load controllers are used against unregulated fluctuations in the load on the The success of a micro- or mini-hydro systems relies demand side. Otherwise, there is long-term damage heavily on the design and sizing of the system. to plant components and, ultimately, more regulation Oversizing or undersizing the system, or inaccurate on the consumer side. assessment of demand or willingness to pay, can all prove costly for the overall viability and sustainability. Regarding end-use metering, the technology depends Sizing the system is tied particularly to resource on the tariff structures that are in place. Tier 1 and availability across seasons. Micro- or mini-hydro 2 customers use low quantities of energy, which production during dry months can be orders of complicates the amortization of costs associated magnitude lower than production during wet months. with connection and in-home installation. When 35 POLICIES AND REGULATIONS FOR PRIVATE SECTOR RENEWABLE ENERGY MINI-GRIDS peak demand in the community exceeds the energy is localised to keep downtimes and maintenance costs supplied by the power plant, operators try to regulate low. Training is also provided to the community on consumption by shifting towards load limiters and household energy management. prepaid meters. With solar micro-grids, operators The management of micro- and mini-grids is made have more influence over consumer choice of end-use particularly complex given the evolution of demand appliances. But micro- and mini-hydro customers can over time. An additional aspect to consider is that buy off-the-shelf AC appliances. The diffusion of appli- although systems may be unable to meet peak de- ances has a significant impact on the ability of the mand, the average plant load factors can be surprisingly power plant to provide continuing levels of electricity low. In Nepal, for instance, the average load factor can services as households and rural enterprises move up be anywhere between 18% and 33% owing to negligible the energy ladder, oftentimes quickly. nonpeak demand. Raising plant load factors, thereby distributing costs over more kWhs, would require Operation and management. The plant O&M greater local development of commercial loads and generally rests with community-based entities for productive uses. But such loads require reliable supply. micro-hydro systems and with private operators Sometimes this dilemma can be resolved by connecting for mini-hydro plants. Local capacities need to be several mini-grids (Box 2.7). developed to undertake minor O&M of the system (e.g., clearing debris from ducts) as well as basic From an O&M perspective, a significant challenge is troubleshooting. For IBEKA’s systems in Indonesia, the restoring supply after unscheduled breakdowns. The operator visits twice daily to check the system, switch remoteness of these plants makes them vulnerable it on or off, and clear any debris from the intakes. to damage from extreme weather conditions. It is not Minor maintenance, such as greasing the bearings, is uncommon, for instance, to see penstocks damaged by conducted weekly; major overhauls take place every large boulders after a landslide or earthquake. In these three or four years. Grid-connected schemes usually cases, operators (usually the community) have to mobilise have an onsite operator. Two or three people share the additional financial resources to undertake repair work work (IBEKA, 2012). To the extent possible, expertise because tariffs provide minimal cost recovery. Box 2.7 The advantages of connecting mini-grids: The example of Nepal In 2011, seven isolated mini-grids were connected together with combined capacity of 132 kW in Bag- lung, Nepal. Mini-grid connection vastly improved energy utilization over the day, increasing the plant load factor of these micro-hydropower plants from 42% to 67%. This cost-effective and sustainable power system encouraged local entrepreneurship, in turn improving several other socioeconomic dimensions. The community formed the Energy Valley Mini-Grid Cooperative and in time developed rules, regulations, and other legal documentation. This model enhances communal responsibility for project sustainability among the members or the beneficiary households. The executive body of the cooperative has ultimate power over the operation, maintenance, expansion of transmission and distribution lines, as well as for setting the power-purchase agreement rate, the tariff structure, and related issues (Pokharel et al., 2013). Tariff design and collection method. Several based subscription tariffs. Charging a tariff based on different approaches to tariff design are being consumption benefits all end-users equally, whereas adopted for isolated micro-hydro projects. These flat rates usually benefit customers who can afford include consumption-based, flat rate, and wattage- more appliances. A third approach is a wattage-based 36 THE ROLE OF MINI-GRIDS IN RURAL ELECTRIFICATION subscription tariff, which works like the flat rate but with Biomass digestion and gasification are mature different maximum consumption levels. Consumers technologies used in mini-grids in South and Southeast who wish to have higher maximum consumption pay Asia, with projects in other world regions as well. Husk a higher monthly subscription fee. This is an effective Power Systems (EUEI PDF, 2015) and Desi Power (UN way to charge for what is valuable in a hydro-based Foundation, 2014) are prominent examples. Both operate mini-grid system (power) and not charging for what several biomass mini-grids in India (Box 2.8). Among is abundant (energy). It also saves on costs. As with other examples that could be cited is SME Renewables other mini-grids, meters in small-hydro mini-grids are in Cambodia (SME Renewables, 2005). Mini-grids being designed to handle prepayment transactions powered by sugar companies or timber mills (or other and serve demand- and load-management tasks. forest-product processors) are common in Africa. The fuel component is a distinguishing feature of biomass- 2.3.4 BIOMASS (TIERS 1–5) based mini-grids. The available feedstocks (type, amount, Biomass resources are widely available in rural Africa quality, and cost) determine the suitability and viability and Asia, where the electricity-access challenge is of the mini-grids, as well as the choice of technology concentrated. Agriculture and livestock production is and system design. For the biomass-powered mini-grid, a livelihood for most people in these regions, giving sustainable access to fuel supply is an essential, and them access to a range of biomass feedstocks. These sometimes the most difficult, aspect of deployment. locally available resources represent an opportunity Figure 2.7 presents an overview of the different for mini-grid development. The technology itself is components, with the remainder of the section mature and scalable, ranging from several kWs to analysing each in more detail. The three private MWs, capable of supplying 24/7 electricity at tiers 1–5, enterprises analysed for this market segment are meeting both basic and peak loads. described below and in Table 2.4. Figure 2.7 Deployment model for biomass mini-grids; tiers 1–5 Tier 0 Tier 1 Tier 2 Tier 3 Tier 4 Tier 5 Ownership Operation & management • Private (BOOM), sometimes with entrepreneur • Fuel supply arrangements are key ownership (BOM) • Minimize environmental impacts Site selection • Local operator • Large villages with high density Tari design and collection method • Anchor loads preferred • Regulated by authorities or through negotiations with • Clusters of villages to facilitate logistics the users • Strong operator training component • Pay-as-you-go (PAYG) Financing • Pre-payment meters or load limiters, • CAPEX subsidies to reduce taris • Appliance-based taris • Corporate or concessional finance Technology • Gasifier (5 kW to 1.5 MW); direct combustion (>1 MW); anaerobic digestion (>5 kW); biodiesel (>5 kW) BOOM = build, own, operate, and maintain; • Can involve pre-pay metering BOM = build, operate, and maintain; • Standard AC appliance CAPEX = capital expenditure. 37 POLICIES AND REGULATIONS FOR PRIVATE SECTOR RENEWABLE ENERGY MINI-GRIDS Box 2.8 Biomass gasification-based electrification in Bihar (India) Saran Renewable Energy Pvt Ltd. (Bihar, India) received the 2009 Ashden Award for replacing diesel generators with biomass gasification. The business model was to install gasification equipment with a dual fuel generator supplying up to 128 kW of electricity to small businesses, farms, and households in Bihar through a local grid spanning about 1.5 km. The plant costs were USD 170 000, about 90% of which was spent on the gasifier and generator and about 10% on the distribution line. The plant was financed by personal equity, a bank loan of USD 40 000 (INR 2 million), and a government subsidy. Paying off the investment (appr. 50%) constitutes the greatest part of the running costs, followed by fuel costs (35%) and O&M (15%). USD 0.04 per kg is paid to local farmers for supplying biomass, mainly stems of a locally grown tree named ‘dhaincha’. To ensure proper ignition, gas from the gasifier is mixed with 10–15% diesel fuel. Customers are charged about USD 0.15 per kWh. With this tariff structure, the plant is expected to recover the capital costs within six years. Small-business customers who previously used electricity from diesel generators (including grain mills, cold stores, sawmills, welding workshops, and farmers) are crucial to the economic success of this plant. These businesses reportedly save 40% by switching to electricity produced from the gasifier. Source: UNIDO, 2014; Ashden, 2009. • Husk Power Systems (India) has nearly 60 plants • DESI Power (India) has developed six biomass- in operation, each with a capacity of 25–50 kW based mini-grids in India. and serving 200–600 households and 5–10 small • Pamoja Cleantech (Uganda) develops biomass- businesses (including irrigation pumps) across 2–4 based mini-grid projects in Uganda providing villages within a radius of 2 km. electricity at tiers 2–5. Table 2.4 Selected biomass mini-grid case studies analysed in the report Enterprise Husk Power Systems Desi Power Pamoja Cleantech Type For-profit energy service Private developer Private developer company Country of India India Uganda operation Systems ~60 plants (2015) 6 mini-grids (2014) 2 implemented Technology Biomass gasification systems Biomass gasifier-powered Biomass gasifier-powered mini mini-grids grids Tiers covered Tiers 1–313 Tiers 1–3 Tiers 2–5 Business Different models applied Installing systems in Installing systems in model communities with anchor communities with anchor businesses businesses and small businesses Sector Subsidies for biomass Grants for capital cost Systems below 100 kW regulation gasification projects, no clear required for feasibility exempted from regulatory strategy for grid interconnection; tariff approval tariff regulation in India does not allow cost-covering operation for biomass mini-grids 13. Electricity is available for 6–8 hours a day to meet tier 1 demand for about 60% of the consumer base: two lights and mobile charging (30W). For the few consumers with higher demand (fans, televisions, refrigerators), Husk Power Systems supplies tier 2–3 power. 38 THE ROLE OF MINI-GRIDS IN RURAL ELECTRIFICATION Ownership. Biomass-based mini-grids have various Site selection. Site selection for biomass-based ownership models—private entities (e.g., energy service mini-grids is largely determined by access to sufficient companies, or ESCOs) or communities that own, amounts of quality feedstocks and proximity to villages operate, and maintain the systems, collecting tariffs for with enough aggregated electricity demand (SADC the electricity supplied. In some cases, the systems are RERA, 2013). Because of the overriding need for owned and operated by different private entities, with sufficient available biomass, biomass mini-grids need the likely involvement of a local entrepreneur/operator. detailed resource assessments—essentially a cropping- In fact, Husk Power System wholly owns most of the pattern study of agriculture in the area—in order to plants but also has a portfolio of plants under franchise design a proper system. This resource assessment or partnership agreements (Ashden, 2011). Additionally, must take harvest cycles into account; some fuels Husk Power now also operates as an equipment may not be available during certain parts of the year. supplier in East Africa, seeking other community-based Biomass-based solutions have been deployed in both enterprises to own and operate the mini-grid. green-field and brownfield contexts (Box 2.9). Box 2.9 Direct combustion of biomass in an island grid: The case of Mafia Island in Tanzania On Mafia Island in Tanzania, the Ngombeni Biomass Project fires a 1.4 MW steam turbine with waste wood from a large, aging coconut plantation. Under a long-term power-purchase agreement, the project sells 1 MW of electricity to the national electric company, TANESCO, at TSH 490 per kWh ($0.22 per kWh). The electricity is distributed across the island by TANESCO’s mini-grid and sold to about 8 000 retail customers at national uniform tariffs (TSH 60 per kWh if less than 50 kW per month; TSH 273 per kWh for electricity greater than 50 kWh) (TANESCO, 2016). Purchasing electricity from Ngombeni allows TANESCO to shut off its own expensive diesel generators during the daytime, saving TANESCO considerable amounts of fuel. The evening load exceeds 1 MW, so the utility switches the distribution system over to its large diesels. Diesel generation by TANESCO is estimated to cost TSH 819 per kWh (about USD 0.37 per kWh). Source: EWURA, 2015. Technology. Depending on the feedstocks and O&M requirements compared with, for instance, the capacity of the system, biomass-based power solar. In addition, small-scale gasifiers are known to production can take different forms (Box 2.10). The be ill-suited to the variable loads offered by mini- technology itself, while mature, has relatively higher grids. 39 POLICIES AND REGULATIONS FOR PRIVATE SECTOR RENEWABLE ENERGY MINI-GRIDS Box 2.10 Biomass-to-electricity conversion processes Financing. Small-scale biomass mini-grid projects are generally financed through a mix of project- Biomass gasification a thermo-chemical level and corporate financing. Husk Power System process in which biomass materials, such as rice managed to raise a grant of USD 2 million, equity husks and wood waste, create “producer gas." from several investors totalling USD 6.65 million, and The producer gas, in turn, is cooled, cleaned, debt of around USD 750 000. The company receives and piped to one or more internal combustion subsidies from the Indian government of USD 7,100 per system (EUEI PDF, 2015). In Cambodia, biomass engines. Biomass gasifiers are available as small gasifier developer SME Renewables received funding as 5 kW and can reach MW scales. Gasifiers for initial projects from the Canada Fund and USAID. require frequent maintenance because of tar After receiving equity investment through E+Co, and residue buildup. the company was able to offer competitive five- Direct combustion/steam turbine is the year financing for turnkey projects (SME Renewable combustion of biomass in a boiler to create Energy, 2016). SME installs rice-husk gasifier systems steam that turns a turbine. Steam turbines are for commercial clients (rice mills, etc.), which cost-effective at scales of 1 MW or more and power commercial loads, and for projects funded are therefore suitable only for larger mini- by grant organizations, including the Energy and grids. Maintenance requirements are generally Environment Partnership and the Centre d’Etude et lower than those of biomass gasifiers, and they de Développement Agricole Cambodgien. accommodate a range of fuels: rice husk, wood The price of feedstocks poses business risks for the waste, empty bunches of oil palm fruit, and so on. biomass-based mini-grid. In several cases, the price Anaerobic digestion is the decomposition for biomass feedstocks for gasifiers is steadily rising of organic waste to produce biogas, which is because of higher demand on the part of mini-grid used to power a modified engine. Digested operators and other users. Crop yields fluctuate from sludge from the digester can generally be used year to year, and dry spells or heavy rainfall further as a fertiliser. The simplicity and modularity of affect prices for biomass feedstocks. There are no design, construction, and operation, as well as standardised schemes available yet to hedge this the many uses for the biogas product, make this risk, but improved agricultural models (technology technology well-suited for rural applications. and management) may help to stabilise prices (ARE, Typical feedstocks in off-grid applications are 2015). Appropriate risk mitigation strategies could be: livestock wastes (e.g., manure) and waste from • Establishing close relationships to local biomass agricultural processing, such as palm waste or sources effluents from palm oil mills , tapioca factories, • Creating dependency by offering feedstock and distilleries (REAP, 2014). suppliers with, for example, waste ash to use as Biodiesel from nut and seed crops is burned in fertiliser (see Box 2.11) a diesel generator. Biodiesel is commonly made • Offering bargain prices for electricity to biomass from coconut (copra) oil, soybean, palm, and suppliers in return for biomass. seeds from the Jatropha curcas plant, as well as from used cooking oil. Biodiesel can be used in pure form or blended with diesel for use in small- and large-capacity systems. 40 THE ROLE OF MINI-GRIDS IN RURAL ELECTRIFICATION Box 2.11 Risk-mitigation strategies for biogasification: day. The company tries to source fuel from within a The case of Novis in Senegal radius of 10–20 km from its plants (EUEI PDF, 2015). • Environmental protection. Biomass power, even at A cooperative project involving a 32 kW biomass mini-grid scales, involves risks to the environment, gasifier provides 24/7 electricity to 1,200 which developers need to heed. Fuel collection villagers of Kalom in Senegal. The Stadtwerke must avoid excessive impact on local forests. Mainz Foundation: Energy for Africa, owns 70% Biomass power projects need to be operated in of the project, and another nine local owners hold ways that minimise pollution, including airborne 2–5% each. The use of biomass has established particulates and liquid and solid effluents. a new market, as biomass becomes a valuable Maintenance of biomass combustion equipment can be good. Twelve hundred villagers benefit from significant, especially with biomass gasifiers. Gasifiers the electrical power, improving their livelihoods are particularly sensitive to variations in fuel quality and supporting micro-entrepreneurship. The (levels of moisture and size of the fuel units). The by-product of electricity generation, known gasification of agricultural residues usually produces as biochar, is used to fertilise nearby farms. By a good deal of ash waste. The gas produced through creating downstream linkages for a by-product biomass gasification usually contains unacceptable that has productive uses, operators indirectly levels of tar, causing environmental and process- reduce the risk of nonpayment. And by involving related problems. Tar from fuel gas condenses at low local stakeholders in different phases, the temperatures, and the residue then corrodes, erodes, project has encouraged social acceptance. The and abrades engines and turbines. In addition, the project has also generated seven direct jobs in removal of by-products such as hot gas particles, alkali, the village, as local staff have been trained for chlorides, and ammonia is costly and has a significant daily operations, maintenance, and accounting. effect on the economy of the system. If environmental Source: ARE, 2015. and technical standards are not enforced, these pollutants are improperly discarded. The daily operation and handling of these by-products require trained and skilled manpower. Taken together, these Operation and management. Biomass mini- maintenance issues have proved to be major barriers to grids have high O&M requirements because of the deployment of biomass gasification. issues related to fuel quality and quantity as well as environmental concerns. 2.3.5 WIND AND WIND-HYBRID AC • Fuel quality and quantity. Developers that do not (TIERS 2–5) own the fuel source must arrange a credible long- The use of wind power for mini-grids remains an term supply, either through long-term agreements underutilised technology. A key reason is the intensified (>3–5 years) or some other means. Many schemes competition between solar and wind-based solutions remain at the pilot stages (e.g., Zambia) (GVEP, for powering isolated mini-grids. Rapid decreases in 2011). Some biomass fuel supplies (e.g., rice husks, the cost of solar technologies, combined with solar’s sugarcane) are seasonal, and alternative fuel modularity, no moving parts and a better understanding supplies for the off-season must be compatible with of resources, have meant that mini-grid developers the project’s gasifier, boiler, or digester technology. often prefer solar over wind-based solutions. Another The plants of Husk Power Systems, for example, reason has to do with physics: because captured wind have a typical capacity ranging from 25 to 50 kW. power depends on the swept area of the rotor, the Each 32 kW gasifier requires approximately 50 doubling of wind-turbine blade length quadruples kg of rice husks per hour or 12 000 kg rice husks the amount of wind power generated. This leads to per month, assuming eight hours of operation per engineering economies that favour large wind turbines. 41 POLICIES AND REGULATIONS FOR PRIVATE SECTOR RENEWABLE ENERGY MINI-GRIDS Despite a market trend towards larger grid-tied or thousands of kW of load), as well as in remote areas systems, off-grid applications, such as at high altitudes where solar electricity is precluded telecommunication stations, offshore generation, by long, dark winters. and hybrid systems with diesel and solar continue to Wind and wind-hybrid systems can provide electricity play an important role in remote areas of developing services across all tiers, with tier 5 the most prevalent, countries (WWEA, 2016). Hybridisation, in particular, because wind turbines are generally installed in large is emerging as a key market for small-wind growth mini-grids that run diesel generators and/or solar driven by incentives to reduce diesel fuel use or to systems that are already providing tier 5 service. provide electricity services at higher tiers. Hybrid Given the limited knowledge base on the deployment mini-grids combining electricity generation from of small-scale wind for electricity access, this section different renewable-energy sources with diesel touches on the literature covering key aspects of the generation have the potential to slash energy costs deployment model in diverse settings. Figure 2.8 (Frankfurt School—UNEP, 2015). In areas with strong presents an overview of the different components and consistent resources, wind power is being of the deployment model; the rest of the section integrated into particularly large mini-grids (hundreds analyses each component in more detail. Figure 2.8 Deployment model for wind and wind-hybrid mini-grids; tiers 1–5 Tier 0 Tier 1 Tier 2 Tier 3 Tier 4 Tier 5 Ownership • Medium penetration requires advanced controls, • Generally conventional isolated rural electrification synchronous condensers, dispatchable loads utility (state utility, investor-owned utility or • High penetration requires all of the above plus cooperative) storage able to respond rapidly to changes in wind Site selection power output levels • Requires at least one year of anemometer data Operation & management collection to prove local resource • Maintenance not frequent but requires special skills • High and steady wind speeds, high price of diesel fuel and equipment for climbing or lowering towers • Economies of scale favor larger mini-grids (hundreds Tari design and collection method of kW of typical load) • Regulated by authorities or through negotiations with Financing the users • At this stage of industry development generally • Pay-as-you-go (PAYG) requires grant component • Pre-payment meters or load limiters, • Financed using debt and equity channels available to • Appliance-based taris utilities Technology • Integrated with existing diesel generation • Low penetration requires few modifications Ownership. Most rural mini-grids utilising wind- Bonair (Bunker, 2015), Vanuatu (UNELCO Engie, 2015), power are operated by traditional small-scale utilities and the Falkland Islands (Falkland Islands Government, in remote areas that have added wind turbines to 2015) (Table 2.5). In Alaska, ten mini-grid cooperative cut the fuel costs of their diesel generators or by utilities use wind power. These projects have received community-operated, grant-funded projects. Wind support from the U.S. government and from the turbines have also been added to diesel-powered Denali Commission, an agency of the Alaskan state mini-grids by utilities in Indonesia, Fiji (Mario, 2009), government (Baring-Gould and Dabo, 2009). 42 THE ROLE OF MINI-GRIDS IN RURAL ELECTRIFICATION Table 2.5 A sample of wind-diesel hybrid mini-grids Village Year Wind Solar Diesel Main Country Status name installed kW kW kW stakeholder Nusa Indonesia 2006 800 80 3 650 State utility Wind no longer Penida functioning Nabouwalu Fiji 53.6 37 200 State utility Wind no longer functioning Nazareth Colombia 2010 425 Government Wind no longer implemented functioning Port Vila Vanuatu 3 025 >5 000 Investor-owned Operating utility Kotzebue USA 915 11 000 Cooperative Operating utility Stanley Falkland 1 980 6 600 State utility Operating Islands Bonair Bonair 11 000 14 000 State utility Operating A few nonprofit organizations and mini-grid- Practical Action partnered with Gram Vikas to develop specialized ESCOs have entered the field, either wind-solar hybrid energy systems that cater to 60 building new wind-powered mini-grids or retrofitting households in two villages in the Indian state of Orissa existing brownfield sites. In India, for instance, (Box 2.12). Box 2.12 Small wind-solar hybrid energy systems in India Practical Action partnered with Gram Vikas to establish small wind-solar hybrid energy systems in the rural areas of Kalahandi district in the Indian state of Orissa. This project is designed to fulfil the light-ing requirements of every household in the two villages. Each of the 60 households (35 in Kamlaguda village and 25 in Tijmali) now have two light bulbs and one charging point for mobile and other acces- sory charging. In developing the project, the community came together and agreed to operate and maintain the systems in the future. Separate committees and bank accounts have been formed in each village. Each household pays agreed user fees to the village committees (Kamlaguda, INR 60, or USD 0.9, per month; Tijmali, INR 30, or USD 0.45, per month) towards the operation and maintenance costs. The project has succeeded in transferring skills so that the community can now fabricate and install the wind-solar hybrid system independently. Source: Practical Action, 2014. 43 POLICIES AND REGULATIONS FOR PRIVATE SECTOR RENEWABLE ENERGY MINI-GRIDS Government-funded or CSR wind-hybrid projects are couple of greenfield wind mini-grid projects have not uncommon. In Colombia, hybrid wind-diesel or been installed in Nepal under a collaboration between wind-solar-diesel mini-grid projects account for over the Asian Development Bank and Nepal’s AEPC (ADB, 2% of off-grid electricity. USD 152 million for these 2014; Kathmandu Post, January 6, 2016) (Box 2.13). projects came from the Instituto de Planificación y In Argentina, a CSR project installed a wind-diesel Promoción de Soluciones Energéticas para las Zonas hybrid system near the remote Patagonian town of No Interconectadas (IPSE) (Rodriguez, 2012).14 A Chorriaca (GSEP, 2013). Box 2.13 Community-operated wind-hybrid systems in Nepal and Malawi The Wind-Solar Hybrid Energy Project, implemented in Bhorleni, Nepal, by the Alternative Energy Promotion Centre (AEPC) has an installed capacity of 25 kW (10 kW wind and 15 kW solar). The project provides electricity to a village with 131 households. The 25 kW hybrid system was installed in 2015 at an estimated total cost of USD 120 000, with AEPC providing USD 90 000 and the community contributing USD 20 000 in cash and USD 10 000 in labour (sweat equity) and fixed assets. It is the country’s first wind- solar pilot project, and AEPC has handed over responsibility for system operations and management to the local consumer committee. In 2007, the Malawi government, through its Department of Energy, implemented a hybrid system (60% solar and 40% wind) in Ulunyeni to provide electricity to unelectrified villages. A total of 150 households benefited from the system, the total cost of which, for each village, was approximately USD 150 000). The project is managed by the community through a committee; the Department of Energy provides technical services. Each household has five lighting points and one socket outlet and pays a minimum of MWK 200 per month (about USD 0.56) towards security for the system and the salary of the operator. The system is also used to run a water pump to meet basic needs. Source: Pandit, 2015; UN, 2013. Site selection. Wind and wind-hybrid mini-grids seasonal variations; this remains a key disadvantage need stable wind speeds of above 5m/s at a height of wind compared with solar. of 30 meters for the turbines to produce electricity cost-effectively. Power output depends on stable Financing. Financiers see a high resource risk in wind speeds. Because power varies with the cube of wind mini-grids above and beyond the demand the wind speed, a turbine that produces 25 kW at 5 risk that exists in every greenfield mini-grid. Wind m/s will produce more than 40 kW at 6 m/s (and vice assessments contribute to high project-development versa). Proper site selection is thus a key requirement. costs, especially for small projects. Thus far, most In general, suitable wind conditions can be expected wind mini-grids add wind generators to existing in regions above a certain latitude on the coast or (brownfield) diesel mini-grids with known demand- on islands (ARE, 2012). If data on wind speed and load curves, reducing at least one element of risk. Risks wind direction are unavailable, wind measurements posed by hurricanes, storms, and lightning strikes are become necessary. These wind assessments are best significant. Vanuatu’s wind installation helps mitigate carried out over at least one year in order to map this risk by using tilt-up towers for its turbines. 14. The wind portion of the IPSE flagship, a 425 kW wind-diesel hybrid project in Nazareth, Colombia, installed in 2008, is no longer functioning (García, Trujillo, and Guacaneme, 2015). 44 THE ROLE OF MINI-GRIDS IN RURAL ELECTRIFICATION The small wind mini-grid industry is still under turbines (from 50 kW to 250 kW) rely on induction development, and economies of scale will further generators and gearboxes (ARE, 2012). These type of reduce manufacturing costs. This, in turn, will make generators produce alternating current (AC), which small wind mini-grids more cost-competitive with must be converted to DC for battery charging. Wind diesel generators in developing countries. At present, turbines below 10 kW are connected to a DC bus for greenfield wind-based mini-grids require subsidy charging batteries (Corbus et al., 2003). schemes because of the cost structures and the risks. Like solar electricity, wind power is intermittent. Technology. Wind-based mini-grids typically utilise Mini-grids that utilise wind turbines must therefore small to medium-size wind turbines (up to 250 kW). also use fossil-fuel generators (generally diesel) or The majority of small-scale wind turbines are built on battery storage, or both (Bhattacharya, 2015). Larger freestanding poles or towers. Wind tower height is a turbines connect on the AC bus and must therefore run crucial variable, as winds are generally stronger and synchronously with any other AC sources present, such more reliable at greater heights. A common tower as fossil-fuel generators and inverters. In village-scale height for small wind turbines is 25 meters (80 feet) wind-diesel hybrid systems, diesel generators are often or more. A rule of thumb employed in the small-wind run 24 hours a day, and the wind power is employed industry is that the wind turbine hub for turbines to reduce diesel fuel consumption when the wind under 20 kW must be at least 30 feet high (10 meters) resource is available (Box 2.14). Adding solar to create (Woofenden and Butler, 2015). solar-wind-diesel hybrid systems can provide further Considering the extreme environment in which wind benefits, especially if solar and wind power alternate turbines are installed (high on a tower in the windiest seasonally (solar in summer, wind in winter) or daily environment possible) reliability is enhanced by having (strong, consistent winds at night), but will present as few moving parts as possible. Direct drives that additional technical challenge for mini-grid supervisory allow power production without a gearbox are best. control. (Bhattacharya, 2015). In this way, parallel use Most small wind turbines (below 50 kW) use direct- of two intermittent renewable resources decreases the drive generators, whereas many medium-size wind overall intermittency of renewable-energy generation. Box 2.14 Brownfield integration of wind: The case of Phu Quy Island, Vietnam Phu Quy is an isolated island in Vietnam’s Binh Thuan province, about 120 km southeast of Phan Thiet city. Living on the island are about 27 000 people in 3,293 households. Their main economic activities are fishing and agriculture. Previously, power for the island was generated solely by the diesel plant. The total capacity of the generators was 3 MW — 6 diesel generator units with a capacity of 500 kW each operating 16 hours a day. The production cost of the energy was 24 USD cents/kWh. Because of frequent interruptions and outages and plentiful wind, wind power was integrated at the site. The project was funded by the Petro Vietnam Power Corporation (PV Power ER). Construction began in 2010 and was finished in September 2012. Six MW of wind power were installed, an amount that covers 80% of energy demand. The total investment was USD 17 million (VND 335 billion). Currently, households are paying 1,863 VND/kWh (9 USD cents/kWh) for domestic use (for the first 50 kWh/month), and business users pay VND 2 329 – 3 105/kWh (11 – 15 USD cents/kWh). Source: SNV, 2014. 45 POLICIES AND REGULATIONS FOR PRIVATE SECTOR RENEWABLE ENERGY MINI-GRIDS Low wind energy penetration (less than 50% of access. In most cases, they represent the least- instantaneous load) generally requires little or no cost option for expanding certain levels of electricity modi-fication to diesel controls. Medium penetration access in rural areas and offer the opportunity (50% to 100%) requires measures to ensure voltage to reduce costs and environmental impact when and frequency stability (including the ability to integrated with existing fossil-fuel-based mini-grids. curtail wind power), dispatchable loads, and special The business models accompanying these technology electronic or electro-mechanical systems to enable solutions and tariffs also vary. low- or zero-load operation of the diesel. High Solar-powered DC mini-grids, which tend to be owned penetration wind (100% to 400% of instantaneous and operated by the private sector, deploy agile, load) allows diesels to be shut off completely at times, scalable systems to provide initial-tier services. Larger but requires the measures just mentioned, as well as solar mini-grids, and those powered by biomass, are an integrated network managed by advanced system providing round-the-clock electricity of sufficient controls, which may include a synchronous condenser quantity for productive use, while taking advantage (for voltage stability), load banks, dispatchable loads, of the scalability of solar electricity to grow as loads power converters, and possibly storage in the form increase over time. Continuing cost reductions in of batteries or flywheel systems (Baring-Gould and battery storage will further catalyse the development Dabo, 2009). of these mini-grids. Small-hydro mini-grids are Operation and management. Battacharya bifurcated, with many built as community owned or (2015) identified that the main challenges for the managed projects, while others are developed with small wind mini-grid sector in developing countries the involvement of private enterprises. Adding wind are competition with diesel and PV systems, cost power to hybridise existing diesel–renewable energy reduction through economies of scale, creating mini-grids is increasingly common as a way to reduce customer awareness, and gathering a year’s worth of fuel and storage costs and to scale up electricity wind-resource data. High maintenance and associated service. administrative capacity have proven problematic in Each type of mini-grid system described above some village mini-grids (Mario, 2009). could play a specific role in a given country’s rural Challenges for long-term operation of wind-hybrid electrification strategies for achieving the SE4All micro- and mini-grids are the availability of spare targets. Combined with individual stand-alone parts and qualified personnel for maintenance and solutions, they could meet a substantial share of repairs. Small and medium-sized wind turbines require the additional generation needed to reach universal regular light maintenance (once or twice a year) such access to electricity in a timely and sustainable as greasing; visual and audio inspection; verification manner. This effort benefits from increasing of guy wires, bolts, and screws; as well as some involvement of the private sector, which requires, in heavy maintenance (every couple of years), including turn, a policy and regulatory framework tailored to refurbishment of rotor blades and replacement of guy the local context. wires (ARE, 2012). The technologies and scales discussed in this chapter also raise various implementation issues that often 2.4 CONCLUSION must be anticipated in regulations. Micro-hydropower This chapter has shown that renewable energy–based projects need to be built in ways that do not unduly mini-grids using an array of technologies are be- affect other water users; they also require assurances ing deployed in different contexts and geographical that the supply of water will not be diverted for locations to provide electricity services across all tiers other purposes. Solar PV technology, which typically 15. Instantaneous penetration of wind turbines in mini-grids is defined as the wind turbine power output (kW) divided by the primary electrical load (kW). 46 THE ROLE OF MINI-GRIDS IN RURAL ELECTRIFICATION uses lead-acid batteries, requires adequate end-of- with licensing provisions, cost recovery and tariff life management. Biomass projects raise particular setting, and main-grid arrival. concerns about the supply of fuel, and communities Regulatory frameworks for mini-grids need to play have the right to be protected from the environmental a balancing role between protecting the investors’ impact of the combustion of those fuels and disposal interest and those of consumers and their environment. of the subsequent waste products. What constitutes that enabling framework is discussed Unlocking capital for mini-grids at different scales in the next chapter, while the final chapter outlines requires regulations that mitigate the risks of specific how some regulators are maintaining the necessary elements of the projects, including those associated balance of interests. 47 POLICIES AND REGULATIONS FOR PRIVATE SECTOR RENEWABLE ENERGY MINI-GRIDS POLICIES AND REGULATIONS TO SUPPORT PRIVATE SECTOR MINI-GRIDS 48 POLICIES AND REGULATIONS TO SUPPORT PRIVATE SECTOR MINI-GRIDS Development of the mini-grid sector depends on tariff regulation (Section 3.2), the risks posed by the right policy and regulatory environment. If that arrival of the main grid (Section 3.3), and measures environment is to support private sector involvement, to facilitate access to finance (Section 3.4). But not it must fulfil certain general conditions as well as all apply equally to all types of mini-grids, and policy specific conditions related to various combinations of making can benefit from a deeper understanding technology and access tier. of the sensitivities of particular combinations of Mini-grids powered by renewable energy have been technologies and tiers of access. Section 3.5 of this deployed on a project-by-project basis for decades. report assesses the influence of policy and regulatory Since the mid-2000s, however, governments have conditions on the various mini-grid approaches shown increasing interest in accelerating their discussed in the previous chapter. development; several have introduced dedicated measures to promote them. Box 3.1 Key policy and regulatory conditions for private sector participation With time, substantial experience with the policy and regulatory requirements for mini-grids has been accumulated. That experience has been translated 1. The generation, distribution, and sale of into national, regional, and global analyses. Notable electricity by private firms must be legal. examples include the World Bank’s From the Bottom Licenses and permits should be obtainable Up: How Small Power Producers and Mini-Grids Can within a reasonable time and at a reasonable Deliver Electrification and Renewable Energy in Africa cost. (2014), Africa-EU RECP’s Mini-Grid Policy Toolkit 2. Private mini-grid developers, operators, and (2015), and the work on framework conditions for investors must be allowed to recover costs for green mini-grids done by the Regional Electricity sustainable operation and within a reasonable Regulators' Association within the Southern African time and at margins commensurate with risk. Development Community (SADC RERA, 2014). 3. Regulations must address the risk to mini- There is a growing consensus on key policy and grids created by the arrival of the main grid. regulatory conditions for supporting private sector involvement in the mini-grid sector (Box 3.1). The 4. Measures should be taken to facilitate access conditions fall into the categories of legal and by mini-grids to affordable finance. licensing provisions (Section 3.1), cost recovery and 49 POLICIES AND REGULATIONS FOR PRIVATE SECTOR RENEWABLE ENERGY MINI-GRIDS 3.1 LEGAL AND LICENSING PROVISIONS complicates the task of public institutions (Practical If the private sector is to have a significant role in Action, 2016). For that reason, dedicated guidelines and mini-grid development, it must have the legal right to licensing procedures for mini-grids are welcome, along develop projects, generate power, distribute and sell with efforts to publicize the information (Box 3.2). electricity to end-users. Broadly, this encompasses The guide to mini-grid licensing in Kenya put out by GIZ, the requirements for forming a company; leasing or the German development agency, and the Ministry of owning land; and acquiring building permits, water Energy and Petroleum’s (GIZ, 2015) is a good example use rights, and licenses to generate, distribute, and of how such information can be made more accessible. sell electricity. Obtaining the required licenses and Tanzania’s mini-grids information portal (minigrids.go.tz) permits can be a lengthy, costly and risky process. also provides comprehensive information for investors In some cases, licensing costs can exceed 10% of a on licensing requirements, financing, and GIS maps. The project’s capital costs (ESMAP, 2016). site offers a library of laws and policies, reports, forms, Processes and procedures related to mini-grid tariff standards, and technical guidelines. development typically receive low priority with public Box 3.2 Addressing market information barriers authorities, given the small size of projects and their seemingly low ratio of impact to effort (from the Private firms interested in mini-grid opportunities authority’s perspective). Sluggish responsiveness, often have difficulties finding information on excessive bureaucracy, and undue complexity can (i) pertinent laws and regulations; (ii) licensing cause delays and long lead times during project requirements, procedures, documentation, and development. Where a dedicated legal framework for fees; (iii) benchmark project-development costs mini-grids exists, the procedures are often unclear and the institutional capacity to implement and administer in off-grid areas; and (iv) local socioeconomic policies and regulations is often lacking. National indicators and the current state of energy business and property laws often cause additional access, including populations, income levels, the complexities when investment comes from abroad. primary source of lighting, and so on. From the perspective of the developer of a mini-grid Bridging this information gap will encourage project, these issues increase costs, uncertainty, and more actors to enter the market. In this risk. And although there is no single ‘right way’ to create regard, public institutions such as rural an enabling legal and licensing environment, some electrification agencies, can play an important general design principles can be adduced from recent role by identifying suitable mini-grid sites in policy developments and stakeholder consultations. consultation with other actors, including those Chief among these are clarity in processes and roles, responsible for grid extension. Preliminary work streamlined regulatory requirements, and specific (or of this kind would reduce the burden on private targeted) licensing arrangements. developers to conduct resource-intensive tasks, including site appraisals, demand assessment, 3.1.1 CLARITY IN PROCESSES, and community engagement. PROCEDURES, AND INSTITUTIONAL ROLES The institutions involved at each stage of the licensing Clear processes and procedures for acquiring needed process vary from country to country. In some countries, licenses and meeting regulatory requirements removes such as the Lao People’s Democratic Republic, Thailand, a key barrier to market entry. Such procedures often and Tunisia, the public utility takes the lead in developing fall in a grey area of the regulatory framework—the and implementing mini-grid programmes. Where national grey area between grid operators, independent power utilities are not actively engaged in mini-grid development, producers (IPPs), and electricity suppliers—which other institutions, notably rural electrification agencies 50 POLICIES AND REGULATIONS TO SUPPORT PRIVATE SECTOR MINI-GRIDS (REAs) have been created. The presence of an institution of financial and other incentive schemes is welcomed that exists for the express purpose of coordinating by mini-grid operators. REAs exist in several countries stakeholders, documenting processes and procedures, in Africa and other regions. Examples include Nepal’s managing the project approval process, delivering Alternate Energy Promotion Centre (AEPC) and the Rural capacity building, and facilitating the administration Electrification Board in Bangladesh (Box 3.3). Box 3.3 The role of institutions responsible for rural electrification Dedicated rural electrification agencies (REAs) (together with donor funds) to fund off-grid provide higher visibility for rural electrification as a development. policy goal and, hence, attract the attention of key A key concern raised in stakeholder consultations is public and private actors, including investors. that REAs sometimes deviate from their intended There are multiple viewpoints on what should be role as nodal agencies for the development of the mandate of REAs. Some would prefer to have off-grid solutions and end-up focusing on grid- them focus exclusively on the off-grid market based solutions. This may be an institutional segment, as grid-based solutions are often handled problem, or it may be related to the conditions by traditional utilities. REAs can make targeted and expectations of donors (e.g., maximising the efforts to scale up the development of off-grid number of connections). It is important that nodal solutions and deploy rural electrification funds and agencies dealing with rural electrification actually other tools to create an ecosystem that will attract serve their mandate in accordance with a national the participation of the private sector. electrification master plan or strategy that outlines A contrary view is that REAs should be all- the role of both grid-based and off-grid solutions. inclusive agencies responsible for on- and off- In Africa, 30 rural electrification agencies grid electrification alike, thus mainstreaming and similar bodies have come together in the off-grid solutions, at least institutionally. The fact Association Africaine pour l’Electrification Rurale that Tanzania’s REA embraces both electrification (African association for rural electrification), or approaches has made possible a levy on all Club-ER (http://www.club-er.org/en/) to accelerate electricity sales and the use of some of the revenue the pace of increasing rural access to electricity. In general, the fewer the institutions involved in the Agency (UPNEDA) will ‘act as the nodal agency for project-development phase, the more attractive the single-window clearance for all mini-grid projects, market becomes for the private sector. To give a sense which include[s] the task [of issuing and facilitating] of the challenge, the first greenfield 4 MW small- desired Government orders, necessary sanctions/ hydro project in Tanzania required approximately permissions, clearances, approvals, consent, etc., in a 27 permits, licenses, or agreements (Rift Valley time-bound manner’ (UPNEDA, 2016). Corporation, 2013). An increasingly common approach is establishing a single-window clearance 3.1.2 STREAMLINED REGULATORY facility hosted at an existing public agency such as REQUIREMENTS TO REDUCE COSTS an REA-like body. A single window can help reduce Regulatory requirements need to strike a balance transaction costs and speed up licensing processes. between ensuring that only serious actors participate In the Indian state of Uttar Pradesh, for example, the in the market and affordable compliance, particularly Mini-Grid Policy of 2016 establishes that the Uttar for new entrants. As a general guideline, fees and Pradesh New and Renewable Energy Development other development costs should not exceed 1–2% of 51 POLICIES AND REGULATIONS FOR PRIVATE SECTOR RENEWABLE ENERGY MINI-GRIDS the total costs of the project (SADC RERA, 2013). generation license (GIZ, 2016).16 The regulatory framework The cost of obtaining some permits outside the in Rwanda categorizes mini-grids as large, medium, small, electricity sector permits (e.g., environmental impact and very small, imposing different licensing requirements assessments, water-rights licenses) does not scale in each case (RURA, 2015). Namibia uses 500 kW as the linearly with project size (Box 3.4). cut-off for applying for a license, while several countries, such as Zimbabwe, use 100 kW. In some countries the Box 3.4 Non-electricity sector permits in Zimbabwe regulators use simplified registration for systems under a specific capacity. Registration, unlike licensing, is solely Although the Zimbabwe Energy Regulatory for information purposes (Tenenbaum et al., 2014). The Authority (ZERA) exempted projects under 100 process is meant to give the private sector a degree of kW from licenses and permits, other agencies such assurance from the government side, while helping create as the Environmental Management Agency (EMA) a central database of mini-grids. In cases when licences and the Zimbabwe National Water Authority are required, the evolving practice is that isolated mini- (ZINWA) imposed charges that affected the grid developers should not have to apply for separate viability of low-impact, small renewable energy licenses for generation, distribution, and retailing (SADC projects (SADC RERA, 2013). EMA, for instance, RERA, 2013). charged 1.5% of the total project value to evaluate Alongside the advantages of segmented licensing are the environmental impact assessment and issue a some disadvantages. A license provides a mini-grid certificate. This, added to independent consultant developer the legal basis to generate and distribute fees, pushed the total cost of compliance up to electricity, thereby lowering or eliminating the risk of 6.5% of the project budget (SADC RERA, 2013). specific elements or stages of their projects. Larger In an effort to improve the ease of doing business mini-grids require more capital and involve more risk, and reduce administrative costs, the EMA has thus increasing the value of licenses for ‘derisking’. An reduced the environmental impact fees from appropriate approach to segmented licensing would 1.5% of project cost to a sliding scale, with the keep project development costs low and mitigate some smallest projects paying a fee of USD 210, larger investment risks. A hybrid approach would impose projects paying 0.8% of project cost, and high- basic licensing requirements along with voluntary impact projects paying 1.0 %. Projects of very measures that the developers could take if they wished. high impact would pay 1–2 % of the total project In Tanzania, for example, projects that are exempt from cost (Black Crystal Consulting, 2016). licensing requirements may still opt to obtain a license, and, in the process, gain the ability to reserve the project site during the development process. Mini-grids of varying sizes cannot be regulated in the same way. For that reason, a segmented approach Box 3.5 covers some specific measures that could reduce to regulatory requirements for mini-grid projects is costs for private developers when integrated into mini- increasingly preferred. The segmented approach is based grid licensing procedures. To varying degrees, these have on the capacity of the project (in the case of licenses and been applied to mini-grids in several countries, and more permits) and its impact (in the case of environmental and widely for other infrastructure projects; they are known to resource permits). In Tanzania, for instance, mini-grids contribute positively to attracting private sector with a capacity of less than 1 MW need not apply for a participation. 16. While exempted from generation license, mini-grids with a capacity of under 1 MW require different levels of environmental impact assessment. To determine whether a full assessment is necessary, the developer must approach the National Environment Management Council and/or district environmental offices for an opinion. The developer then registers the project and submits a project brief which, after a maximum of 45 days, elicits a response. Three alternative outcomes are possible: (i) the regulator deems the project brief sufficient, which is usually the case for very small projects (< 100 kW) unless they are situated in a nature conservancy; (ii) the regulator requests a preliminary EIA; or (iii) the regulator requires a full EIA (GIZ, 2016). 52 POLICIES AND REGULATIONS TO SUPPORT PRIVATE SECTOR MINI-GRIDS Box 3.5 Improving licensing procedures for mini-grids Standardising project documents. Everyone a particular waiver applies or not. Collaboration wins when transactions with regulatory bodies and coordination between the relevant agencies are transparent, standardised, and timely. will help developers (and the import officials) save Guidelines and templates for small projects can be time and cost. This also applies to equipment being standardised and, as far as possible, non-negotiable shipped within national boundaries, where widely in order to remove administrative barriers and different tax codes may apply to renewable energy uncertainties. As the system size increases, components across state borders. standardised templates may still be available, but Striving for regional harmonisation. The private with negotiable terms and provisions (SADC RERA, sector will always be looking to grow and expand 2013). Standard feasibility reports and detailed its market. Regional harmony, comparable policy 17 project reports should be emphasised, especially structures, and similarity in regulatory requirements where local resources strongly influence project and working documents all help the private sector viability (e.g., small hydro). Standardisation enables execute projects more efficiently and with greater regulators to evaluate projects quickly against confidence, because regional harmony can greatly established benchmarks, while the developer is reduce the costs of market development. Regional aware of its obligations and kept well informed. bodies can play an important role in supporting Digital data management and automation may regional harmonisation efforts. Examples include also be integrated into the process, with online the ECOWAS Regional Centre for Renewable Energy applications for licenses and automatic evaluation and Energy Efficiency; the newly formed Centre for of sites based on GIS databases. Renewable Energy and Energy Efficiency within Minimising/standardising response times. the Southern African Development Community; Maximum response times or, in certain cases, positive and the East African Centre for Renewable Energy administrative silence (if a request is not answered and Energy and the Regional Centre for Renewable within a certain time, it can be deemed approved) as Energy and Energy Efficiency (RCREEE). well as the principle of subsidiarity (where possible, Quality assurance and safety. While safety is the authority closest to the issue with full access to paramount, appropriate standards should be balanced data has the authority to decide on the issue) can be against the cost of compliance and verification. applied to simplify and streamline processes. Examples of efforts in this direction include the Enabling import regulations for off-grid Renewable Energy Test Station in Nepal, which systems. Fiscal measures, such as import assists the nation’s Alternative Energy Promotion tax exemptions, have been used to incentivise Centre in setting product quality standards and later renewable energy deployment. When importing tests products based on the standards set, and the equipment, requests to reduce or waive taxes are Mini-grid Quality Assurance Framework developed usually made to the concerned ministry or authority. by the U.S. Department of Energy, which provides a In practice, officials in those ministries often standardised protocol for assessing mini-grid power have limited understanding of the specifications quality and reliability across a wide spectrum of mini- of renewable energy equipment and may have grid tier levels, comparing the results with advertised trouble making expedient decisions on whether performance levels (USDOE, 2015). 17. The detailed project report is prepared once the feasibility report is accepted. It covers details on capital cost, technical parameters, technology, existing resources, techno-economic and environmental studies, schedules, and so on. 53 POLICIES AND REGULATIONS FOR PRIVATE SECTOR RENEWABLE ENERGY MINI-GRIDS 3.1.3 MITIGATING PROJECT- up mini-grid development, where the private sector DEVELOPMENT RISKS THROUGH approaches the public authority with a proposal to PROVISIONAL LICENSES AND develop projects within a certain area, the concession CONCESSIONS model is top-down: the public body puts out tenders In some countries, one observes competition for good for private developers to service selected areas under mini-grid sites between private project developers. predefined conditions (discussion in detail in 3.3.2). This situation creates the risk that two or more project developers will carry out costly assessments and 3.2 COST-RECOVERY AND TARIFF stakeholder consultations on the same site, whereas REGULATION only one project developer will get the license. Tariff regulation has a strong influence on the Introducing provisional licenses would allow project viability and sustainability of mini-grids, as well as developers to allocate their resources more efficiently on the attractiveness of the mini-grid sector for and would enable mini-grid projects to be developed private operators. From a private sector perspective, at more sites. Provisional licences provide exclusivity recovering costs and earning margins appropriate for for a few years, allowing the licensee to conduct the degree of risk assumed are essential for roll out preparatory activities (such as assessment studies, beyond a few pilot projects. financial structuring, land acquisition, construction, and so on) and facilitating the process of obtaining The topic of tariffs is also a highly politically sensitive, general business documents (incorporation, tax especially when—as it is often the case—mini-grid registration) and building permits (EUEI PDF, 2014). models are built on charging tariffs higher than the national grid tariff. Often this issue is viewed through The concession model is another possible solution to the lens of equality and fairness between mini-grid the problem of site risk and licensing. A concession and main-grid customers. The fact that the rural is a contract between a public and private entity population pays more than its urban counterpart is granting the latter an exclusive right to build, operate, perceived as unfair. and maintain assets for the generation, transmission, distribution, and sale of electricity to end-users for However, there is a growing recognition of two a given number of years in specified geographic countervailing facts: First, the generation and service areas. It binds the private operator to deliver distribution cost of providing electricity in rural areas a specified quality of service and a certain number of not reached by the main grid is simply higher than it connections. is in urban or peri-urban grid-connected areas. And second, although cost-recovery tariffs for renewable Holding the concession for a specified area typically energy–based mini-grids may be higher than main- entails a guarantee that no other parties will be grid tariffs, they are lower than alternatives, such allowed to develop and operate mini-grids in the same as kerosene lighting, dry cell batteries and diesel area, along with preferential tariff arrangements and generation, and provide better and cleaner services. possibly financial incentives. Concessions are usually awarded for larger areas through tendering, allowing In recent years, a growing number of countries have the holder to bundle or cluster mini-grid projects or adjusted their tariff regulations to attract greater private to adopt another approach (such as grid extension) sector interest in the mini-grid sector. Recent policy to provide the necessary services. While the developments suggest a trend towards tailored regulatory provisional license model is more suitable for bottom- requirements for different scales of mini-grids (Figure 3.1). 54 POLICIES AND REGULATIONS TO SUPPORT PRIVATE SECTOR MINI-GRIDS Increasingly, small-scale systems18 (several kWs to test business models (such as cross-subsidisation)19 around 100 kW) are being exempted from tariff and technologies in a light-handed regulatory space approvals, allowing operators to decide tariffs (as well in which they can design cost-recovery tariffs at low as structures) in consultation with the communities regulatory costs and lower revenue risk. At the same they serve. As systems become larger, operators time, regulatory agencies save money and time, as prefer some form of official tariff approval to mitigate they need not approve tariffs for a large number of the risks of future tariff disputes that could put capital projects each servicing a small number of customers. investment at risk. Approaches to tariff regulation This is a boon because, if mini-grids were deployed include allowing operators to charge either the at the scale needed to make advancements in rural national uniform tariff (where applicable), coupled electrification, a case-by-case approach to tariff with some form of ‘viability gap’ funding (such as regulation would consume substantial regulatory recurrent tariff subsidies, capital subsidies, or both); time (unless approval processes were largely or a pre-approved tariff combined (if the tariff does standardised), while introducing time delays and tariff not cover costs) with capital subsidies. This section risks for projects. analyses these approaches and puts forth some Several countries have adopted regulations that general recommendations for tariff regulation. exempt small mini-grids from tariff regulation. In Tanzania, no prior regulatory review or approval of 3.2.1 SMALL MINI-GRIDS: EXEMPTION proposed retail tariffs is needed for mini-grids below FROM REGULATORY TARIFF APPROVAL 100 kW. The Electric Power Sector Reform Act in Nigeria Exemption from regulatory approval for tariffs also exempts systems below 100 kW of distributed charged by mini-grids operating below a certain power from retail tariff approval. Peru, which offers capacity threshold (e.g., 100 kW) means that the task concessions to private mini-grid operators, exempts of balancing cost-recovery and consumer affordability municipally-owned small power producers from tariff rests mainly with the private developer or operator. regulation. The Uttar Pradesh Electricity Regulatory Under these circumstances, project developers can Commission recently announced regulations for mini- 18. The threshold between small and large mini-grids varies greatly between countries as well as by technology, as will be evident from the country examples presented later. 19. Cross-subsidisation is the practice of charging higher prices to one group of consumers to subsidise lower prices for another group. It is usually done by charging higher prices to anchor loads or local businesses. Whereas closing the viability gap entails outflows of public funds, cross- subsidies place less additional burden on the government. 55 POLICIES AND REGULATIONS FOR PRIVATE SECTOR RENEWABLE ENERGY MINI-GRIDS grids generating electricity from renewable sources, in which households own few electrical appliances. To stating that mini-grids being developed without bridge the so-called viability gap, financial support may public subsidy can set tariffs as mutually agreed with be required. In Nepal, for example, even though isolated their consumers (UPERC, 2016). mini-grids are already exempted from tariff regulation, But as proven models are scaled up, some form of they benefit from capital subsidies in recognition of tariff regulation may be needed to protect investors the viability gap. The country’s policy of subsidizing from the disputes that could arise once the developer’s renewable energy supplies the basis for subsidising engagement is irreversible. In Tanzania, the regulator isolated mini-grid projects (e.g., micro-hydro from 1 kW EWURA considered and partly resolved this issue in to 1 MW, solar up to 1 MW, and wind/solar-wind hybrid up rules applicable to small power producers. The rules to 100 kW) (AEPC, 2016). state that the regulator may review the retail tariffs of very small power projects upon receipt of a petition 3.2.2 LARGE MINI-GRIDS: NATIONAL signed by 15% of the households in the area served by UNIFORM TARIFFS WITH VIABILITY GAP the producer (GIZ, 2016). FUNDING In Rwanda, the regulation does not set tariffs, National uniform tariffs (or their pursuit) are common stating instead that ‘The Authority shall have the in developing countries. In most cases, they are too right to review the tariff calculations undertaken low to allow cost-recovery and thus too low to allow by Isolated Grid … Licensees’ to ensure that tariffs sustainable operation and attract private investment generate required revenues20 (RURA, 2015). In this in mini-grids. In such cases, the uniform tariffs must context, standardisation of the methodology of be coupled with viability gap funding. An approach is tariff calculation simplifies the process of approving to utilise large and diverse customer base by pursuing tariffs before implementation while also protecting cross-subsidisation. In this case, the rural communities the interests of both operator and customers. From would pay the national uniform tariff, and the utility a mini-grid investor’s perspective, the more concrete would charge all of its customers a levy. Although and well-defined the tariff calculation process is, cross-subsidisation may be a solution for a small the greater the protection and the lower the risk. number of mini-grid projects, it has limited potential Therefore, in cases where tariffs are not determined for scale-up. bilaterally between the community and operator, In Kenya, the generation assets of at least 19 mini- regulators are advised to define the mini-grid tariff grids, predominantly diesel-based, financed through calculation methodology as accurately as possible the country’s Rural Energy Authority are owned by (see Box 3.6). the Ministry of Energy and Petroleum. Kenya Power Providing operators the freedom to set tariffs does not (KPLC), a national utility, operates and maintains the necessarily guarantee cost-recovery. From an operator’s generation systems, as well as the distribution assets. perspective, tariffs are a major source of revenue to Because the electricity tariff is uniform for both on- meet operating costs and, in some cases, the costs and off-grid power, the more-expensive electricity of capital investments, risk, and contingency funds from diesel-based mini-grids must be cross- for unscheduled maintenance and repairs. But local subsidised by the government through a rural energy socioeconomic conditions may constrain, at least initially, levy on all electricity bills. An approach where the how much the operator is able to recover through tariffs. ratepayers and the government must cover the cost of Moreover, initial consumption from a mini-grid may be all electrification rollouts would require tremendous low, especially if the village is starting from a situation financial resources (EUEI PDF, 2014).21 20. Under the regulation, revenues from tariffs should cover reasonable costs of operating the grid, including depreciation charges and fuel costs, if any, plus a reasonable return on the net fixed value of the generation and distribution assets, plus a reasonable margin to cover the costs of supply activities, less subsidies or grants received specifically for the purpose of lowering tariff levels. 21. The energy regulatory commission has allowed one private company, Powerhive, to charge a tariff higher than the national uniform tariff. This could signal a shift in Kenya’s tariff policy for mini-grids. 56 POLICIES AND REGULATIONS TO SUPPORT PRIVATE SECTOR MINI-GRIDS Even as several countries are now introducing 3.2.3 LARGE MINI-GRIDS: COST-COVERING regulatory changes to accommodate more flexible TARIFFS AND VIABILITY GAP FUNDING (yet standardised) approaches for tariff setting, others Regulated cost-covering tariffs for mini-grids may remain committed to national uniform tariffs. In those be broadly classified into break-even tariffs and cases, cost recovery depends heavily on financial profitable tariffs. The former are often associated support. Many private mini-grid operators find that it with community-owned and -operated mini- is ‘unrealistic to expect that governments and donors grids. Profitable tariffs, designed to generate will be able to offer a credible commitment to cover sufficient return on investment to appeal to private any ongoing shortfall in revenues’ (Tenenbaum et al., investors, typically cover all investment, operating, 2014). On an operational level, it is risky for a private and financing costs, as well as those of scaling up project operator to place its trust in ongoing public to reach more customers. Generally, a margin taken financial support (e.g. more than 10 years) given often by a private company increases tariffs. However, unforeseeable changes in policy and underfunded well-run companies can make up for this margin budgets. For these reasons, subsidisation of capital through efficiency, thus keeping tariffs at reasonable expenditures is often preferred over operating levels. subsidies by the private sector. Larger mini-grids (generally those with a distributed Even with capital subsidies, the business case for power capacity of greater than 100 kW) are more renewable energy–based mini-grids remains relatively likely to be subject to tariff regulation, given their weak under a uniform tariff scenario. Considering the wider customer base and the need to protect economics of the various mini-grid technologies, the investments from local tariff disputes. Regulators technology that might work with capital subsidies may take a variety of approaches to cost-recovery alone is small hydro (because it has the lowest tariffs, while still protecting customers from tariffs generation costs). The others in many cases cannot that yield higher-than-expected returns to operators. be operated profitably at uniform tariff levels without Tariff caps are one such approach. Another is ongoing subsidisation. In some cases, both forms of standardised tariff calculation methodologies. Both subsidy may be needed for sustainability. A study done are discussed below. in Ghana showed that, to achieve cost recovery for a 140 kW solar photovoltaic (PV) mini-grid with a 100 Tariff caps limit mini-grid tariffs to a certain kVA diesel backup, subsidies of more than 50% of the maximum linked to generation technology, village capital costs would be needed to ensure that electricity type, and system size. The operator is free to could be supplied at tariffs that the community would apply any tariff up to the maximum. Where tariff pay. In order for the mini-grid to provide electricity at caps are applied without taking into consideration the national uniform tariff, ongoing operating subsidies the differential costs of technologies, some would be needed in addition to a 100% capital cost technologies with relatively higher generation subsidy (ESMAP, 2016). costs may not be sustained in the regulated sector. In a national uniform tariff, creating an ecosystem This may be the case, for example, with solar PV- for private sector participation and large-scale battery systems. Therefore, in countries with tariff deployment of mini-grids would be challenging, caps, PV-battery systems are usually found in the without a major outlay of financial support. A possible unregulated sector below a certain power size (e.g., solution in such circumstances is a hybrid approach solar DC mini-grids). In some cases, tariff caps allowing private operators to charge higher tariffs are not applied by the regulator or through the that, while still regulated to protect consumers, would energy laws, but by a financing institution in the ensure greater cost recovery for operators and reduce form of a quasi-tariff cap. One example is IDCOL in the level of public support needed. Bangladesh, which limits mini-grid tariffs to around 57 POLICIES AND REGULATIONS FOR PRIVATE SECTOR RENEWABLE ENERGY MINI-GRIDS 35 Taka/kWh (USD 0.43/kWh in June 2016), local political interference, because they do not set while providing capital subsidies and attractive the tariff but only indicate its upper limit. debt financing conditions to the mini-grid Transparent and standardised tariff calculation 21 operator. methodologies based on pragmatic assumptions IDCOL’s mini-grid program is well received among for cost and revenues, as well as available financing, mini-grid developers, even though its tariff cap is are crucial to ensure that the market has the right relatively low. It is important to note, however, that incentives to develop mini-grids. One of the most tariff caps do not protect the mini-grid operators from common approaches is the cost-plus method (Box 3.6). Box 3.6 Tariff calculation using the cost-plus approach The most common tariff calculation methodology is Negotiating these parameters individually for the cost-plus method. The first step in the method each mini-grid is a drain on the authority’s human is determination of the regulatory asset base: an resources. Recognising this, governments in Senegal assessment of the value of the assets currently in use or in Nigeria are in the process of establishing more for the regulated service. This assessment is typically standardised procedures to speed up the process. conducted periodically (e.g., every second or third In Senegal, the regulator (Commission de Régulation year) to account for new expansion and depreciation. du Secteur de l'Electricité, CRSE) reevaluated the Considering inflation, the assets are commonly valued effort required for cost-plus tariff setting in mini-grids at what it would cost to replace them today. Valuation after having approved the very first such tariff in 2013. includes depreciation in the value of the asset through CRSE concluded that the number of kWh sold under wear and tear. Typically, assets funded by grants are the tariff set is much too small to justify the effort. excluded from the regulatory asset base because it Therefore, CRSE stopped using the conventional cost would not be appropriate for the private sector to plus method and began developing a new approach. earn a return on the donor’s capital. Annual revenue To set tariff caps for solar-battery mini-grids, CRSE requirements are calculated based on operational applied the cost-plus method to several existing mini- expenses (comprising fuel costs plus operations grid businesses and compared the outcomes. From and maintenance, management, and development this exercise, it derived tariff caps for different subsidy costs), the cost of financing the business, and the levels of solar-battery hybrid systems. Operators of allowable depreciation of assets. The cost of financing systems with a 50% capital subsidy may charge a the business is typically measured as the weighted higher tariff than operators of systems with a 90% average cost of capital. The average regulated cost- capital subsidy. The fixed cap encourages electricity plus tariff is calculated as the revenue requirements supply companies to secure the largest villages divided by the number of kWh sold each year. available, since economies of scale reduce the costs When a project is first commissioned, the cost-plus and increase margins. method uses assumed costs. These are replaced The Nigerian regulatory commission NERC is making by real costs as soon as they are known. Although efforts to simplify the calculation methodology by the method is well-defined, several negotiable developing a cost-plus software tool for mini-grids. parameters affect the tariff, such as the details of In other words, it is using information technology to asset evaluation and allowable depreciation rates. reduce the effort required to define tariffs. 21. IDCOL channels grants and concessionary financing up to 50% and 30% of the project costs, respectively. The remaining 20% of the project costs are met by the project sponsor. The concessionary loan has a maximum tenure of 10 years, with a two-year grace period. The applicable interest rate is 6% per annum (IDCOL, 2015). 58 POLICIES AND REGULATIONS TO SUPPORT PRIVATE SECTOR MINI-GRIDS Tariff calculation methods are increasingly being Figure 3.1 Regulatory approaches to protect mini-grid standardised to allow for more systematic assessment operators from losses in case of main-grid arrival and approval by regulators. Greater standardisation in tariff calculation means that mini-grid operators Rural electrification plan approach the regulatory authority with a nearly ready model that then serves as the basis for brief negotiations between all parties involved. While encouraging progress has been made, in many markets the legal framework for cost-covering tariffs Assignment Selection of village by for mini-grids still does not exist or, if it exists, is of concession mini-grid operator not implemented. Even where tariff differentiation is permitted, the methodology for tariff approval may not be clearly established; where it has been established, it may not permit cost recovery because The main-grid arrives at the mini-grid site of incorrect or overly rigid input assumptions or because insufficient experience with the method still raises uncertainties and costs. Policy makers are encouraged to take measures to identify the most Grid Compensation suitable tariff determination approach in consultation interconnection mechanism mechanism with local stakeholders, and to formalise adoption, thereby helping to lower the risk of a key component Private sector- Public sector- of the mini-grid business model. driven process driven process 3.3 MITIGATING THE RISK POSED BY 3.3.1 RURAL ELECTRIFICATION MASTER THE ARRIVAL OF THE MAIN GRID PLANS One of the main risks faced by mini-grid operators is The selection of any mini-grid site is based on information the unexpected arrival, within their service area, of the about when the main grid will reach the site. Such national grid, particularly if their assets have not yet information, when it is available, is usually contained in been amortised. Although the risk of untimely arrival a rural electrification master plan (or strategy) in the of the main grid has been a major hurdle for mini-grid form of maps defining existing and planned extension development, the risk can be effectively mitigated by of the national grid. Mini-grid developers (in a bottom- reliable rural electrification master plans that reveal up, market-driven approach) and public authorities (in a the exact location and time for grid extension (and top-down concession scheme) will use the information other mini-grid projects) over the short, medium, and to select villages with a long lead time for main-grid long term. This information helps mini-grid developers connection. Rural electrification master plans may select sites based on the grid-extension plan and their also provide information on population density, own preferred amortisation timeframe (Figure 3.1). average household income, likely income growth, Alternatively, concession arrangements assigning and potential semi-industrial and industrial customers exclusive areas to specific mini-grid operators can (telecommunication towers, mines, forestry, etc.), as provide security from main-grid connection until the well as on whether other mini-grid project developers end of the concession period (typically 10 to 20 years). are already active, possess licenses, or have registered Finally, in case of main grid connection, compensation for specific sites. Generally, rural electrification master arrangements and grid interconnection mechanisms can plans are meant to be well-integrated into the national be established to provide security to mini-grid operators. development agenda (Box 3.7). 59 POLICIES AND REGULATIONS FOR PRIVATE SECTOR RENEWABLE ENERGY MINI-GRIDS Owing to changes in the political landscape and the sources, which is often difficult to predict. Problems budget, rural electrification master plans are often of coordination between federal and state actors and out of date and unreliable. In some countries, they do with distribution companies are also common, making not exist or are not published for fear of provoking it difficult for any single entity to produce a long-term a backlash from communities that are dissatisfied plan. Under such circumstances, complementary with the timeframe for grid connection. Another key policy and regulatory measures are needed to tackle challenge faced by governments is that electrification the risk of main-grid arrival. These include concessions, initiatives are often tied to availability of public compensation, and interconnection. All are discussed financing from both domestic and international in turn below. Box 3.7 Rural electrification master plans and the national development agenda Access to electricity has substantial forward linkages challenging. If accomplished, its effect on private for rural communities and their socioeconomic sector participation can be very positive. well-being. Generally, these linkages are marked by Not all forms of electrification are the same. Its considerable improvements in productivity, income, forward linkages are greatly influenced by the and livelihoods, all of which produce spill-over effects quantity and quality of supply, and by the ability of for water, health, and food. In fact, off-grid renewable rural households and enterprises to afford it. Rural energy solutions have the potential to advance at least electrification strategies must therefore identify the 12 of the Sustainable Development Goals defined by supply-side options (e.g., grid extension and off- the United Nations. It is for that reason that access grid solutions) and take into account the present to electricity should be considered a core part of the and future energy landscape of rural communities. national development agenda. This includes anticipating how energy consumption A country’s rural electrification strategy should might evolve over time, considering appliances closely assess the role of grid-based and off-grid (lighting, radio, television), telecommunications solutions to expand electricity access in a cost- (base stations, mobiles), agriculture (agro- effective, time-bound, and sustainable manner. processing, irrigation), health (vaccine cooling, Integrating off-grid solutions, including mini-grids, lighting), water (pumping, treatment), community into the rural electrification plan sends a strong infrastructure (street lighting, schools, community political signal to sector participants and helps centres), and rural enterprise loads (e.g. sewing overcome institutional inertia. Designing a plan is machines). Given these interlinkages, policy an important first step.22 But backing the plan with makers are encouraged to examine closely the concrete measures in a way that mobilizes action opportunities that mini-grid solutions offer for both at the institutional level is often considerably more electrification and sustainable development goals. 3.3.2 CONCESSION ARRANGEMENTS willingness to pay. The regions and villages selected for Concession contracts grant operators exclusive rights to concessions (typically based on a rural electrification master service a given area for a period of time (typically 15–25 plan) are generally in places where the main grid is unlikely years) that is long enough for the operator to amortise to arrive in the short term and the mini-grid represents a all assets under tariffs that do not exceed customers’ bridge solution with a clearly defined timeframe. 22. Among the energy access planning tools available to policy makers is the Asian Development Bank’s Sustainable Energy Access Planning framework (http://energyaccess.org/wp-content/uploads/2015/06/Sustainable-Energy-Access-Planning.compressed.pdf). 60 POLICIES AND REGULATIONS TO SUPPORT PRIVATE SECTOR MINI-GRIDS The concession system can take a top-down or bottom- There are drawbacks to concession arrangements. up approach, as seen from the country examples in Box Should the main grid arrive earlier than expected, 3.8. The bottom-up approach has seen much greater the community served by the concessionnaire risks interest among the private sector, given the higher being locked into mini-grid service. In such cases, transaction costs associated with participating in tenders. compensation or interconnection becomes important, The two approaches may be adopted simultaneously. as discussed in the next section. Box 3.8 Concession models in Mali, Senegal, and Madagascar Mali has aggressively pursued private concessions opportunities for private micro-utilities to develop for the development of mini-grids, adopting a dual projects to supply power to remote communities. approach: top-down and bottom-up. In the first Under the ERIL programme, operators apply case, the Malian Agency for Household Energy and for a renewable contract under which a 15-year Rural Electrification (AMADER) solicits bids for the concession is issued by the Ministry of Energy and electrification of designated ‘priority electrification the Development of Renewable Energies. To date, zones’. Projects are selected on the basis of the lowest approximately 30 systems are operating in the proposed tariff. If bidders prove reluctant, the rural country, owned and managed by numerous different electrification fund may finance feasibility studies. private operators, with several hundred more in In the second case, projects are selected based on the pipeline. A key factor in the success of the ERIL promoters’ ability to develop and operate a viable programme has been the ability for operators to set project with a fixed investment subsidy (limited to an their own tariffs under the authority of the national average 75% of the capital investment cost). regulator, CRSE (Commission de Régulation du More than 60 local private or community-based Secteur de l’Electricité), and a clearly defined tariff operators are now active in about 190 mini-grids, calculation model (ESMAP, 2016). spread nearly evenly between the top-down In Madagascar, low electrification rates are and bottom-up approaches. Minimum technical being tackled through a build-operate-transfer specifications and quality-of-service standards are set mini-grid model based on concessions awarded in the concession contract documents. Concessions through tenders. After technical acceptance by are usually granted for 12 or 15 years depending on the Agence de Développement de l'Électrification the installed capacity. Ownership of the fixed assets Rurale (ADER), the tariff is negotiated between the remains with the state; the operator is compensated contractor and the local community and submitted at the end of the contract for the nondepreciated to the regulator for approval (ECREEE, 2012). Under portion of its contribution to the assets. The tariffs the policy, the government will award concessions charged by mini-grids operated by private actors to eligible projects for a duration of 15–25 years. are often much higher than those of the national The first tender for four solar-PV mini-grids was utility—at approximately USD 0.50/kWh rather than launched in mid-2015. Further auctions for solar the utility’s USD 0.20/kWh. Most of the concessions PV mini-grid capacities are expected throughout operate diesel mini-grids, but the government has 2016. To date, ADER has launched two calls and started supporting hybridisation, using funding from has planned more for 2016 and 2017 to achieve its bilateral and multilateral donors and development rural electrification objectives. PV, wind, and hybrid banks (ESMAP, 2016). power are expected to play a crucial role in the Senegal’s bottom-up approach, which runs future (Federal Ministry for Economic Affairs and alongside its top-down approach, provides Energy, 2016). 61 POLICIES AND REGULATIONS FOR PRIVATE SECTOR RENEWABLE ENERGY MINI-GRIDS 3.3.3 INTERCONNECTION AND generation can also serve as a backup whenever the COMPENSATION main grid fails. Such models are increasingly being discussed in markets where large areas connected to When main grids reach mini-grid sites before the grid are underserved.23 concessions have expired or assets have been amortised, the mini-grid must be integrated within To ensure that the interconnection mechanism the main grid and/or the operator compensated. The truly mitigates risk for mini-grid operators, full mechanisms for both must be put in place ahead information about the applicable feed-in tariffs and of time to minimise risk and allow proper planning other requirements must be available before the (financial and otherwise) of mini-grid development. investments in mini-grid assets are made. There are three possibilities for connecting a mini- grid to the newly arrived grid, a process referred to as Box 3.9 Connecting micro-hydro to the grid in Nepal and Tanzania interconnection. First, if the mini-grid operator continues to generate Based on a policy approved in July 2014, the electricity and sell it in bulk to the grid, it becomes a Nepal Electricity Authority signed a power ‘small power producer’ (Box 3.9). This approach has been purchase agreement with two community-owned implemented in Tanzania, among other places. Such micro-hydro projects that were installed in 2007 migrations require (i) a feed-in tariff with a prespecified with technical guidance and subsidies from the pricing formula and (ii) a standardised power purchase Alternative Energy Promotion Centre. Leguwa agreement with guaranteed purchase of power. Because Khola (23 kW) in the Dhankuta district and Syaure mini-grids have lower capacities and higher transaction Bhumi (40kW) in the Nuwakot district will now be and operating costs than the main grid, the traditional connected to the utility grid. The agreement calls feed-in tariff may be insufficient to recover investments for a purchase price of 8 U.S. cents/kWh during in accordance with the original timeframe. For this the dry season and 4.57 U.S. cents/kWh in the reason, a special tariff framework has to be set up for wet season. With more than 2 000 pico, micro, mini-grid projects. The policy should clearly outline who and mini projects existing in the country and more will bear the cost of interconnection and why. than 100 private companies involved in the supply Second, if mini-grids continue to serve retail customers of equipment for these projects, this step from the with electricity bought from the national grid, they become authority is very encouraging for private sectors. ‘small power distributers’. In such cases, additional legal In Tanzania, a 4 MW small-hydro plant is the first provisions and the applicable tariff regulation need to be greenfield project under the SPAA scheme, which considered. In Cambodia, 250 small power distributors brings electricity to 14 villages (3 000 households, are licensed by the Electricity Authority of Cambodia. 25 000 people) while also selling electricity to These formerly isolated mini-grids gave up operating TANESCO, the national utility. The project includes diesel generators in favour of purchasing cheaper 24-hour the construction of 120 km of power lines and electricity from the national grid. the operation of an innovative cellular phone– Third, a mini-grid with the capacity to generate power based, prepaid electricity vending system to can potentially improve the quality of electricity supply sell electricity directly to customers (Rift Valley to consumers through tail-end/local voltage support, Corporation, 2013). running its mini-grid in ‘island’ mode. Its power 23. In India, current regulations require the mini-grid generator to shut down if the main-grid fails, thus depriving the mini-grid of the opportunity to supply its customers. From a mini-grid standpoint, these regulations will have to be followed unless proper controls can be installed to ensure islanding (isolation) that meets distribution company's technical requirements (MNRE, 2016). 62 POLICIES AND REGULATIONS TO SUPPORT PRIVATE SECTOR MINI-GRIDS The other way of addressing the risk of main-grid arrival Countries have introduced a variety of compensation is to compensate operators for the residual value of the mechanisms for mini-grids (Box 3.10), though in most mini-grid assets rendered uncompetitive by the main grid. cases the mechanism is not specified in enough detail With a compensation mechanism, the regulatory authority in the legislation or regulations to allow the operator can, when setting the tariff, assign a depreciation scenario to build a business model around it. In other cases, the for fixed assets such as the distribution system. Moveable modalities of payment of the compensation remain assets, such as generators and solar panels, would not be to be defined. Rural electrification authorities may included, because the operator is free to move these to be prevented from making direct payments; often another site. In a fair compensation scheme, depreciation they are required to tender their spending above a times are set according to the main-grid connection risk minimum threshold. Addressing such restrictions may that the operator bears and the limits shown in the profit require additional rules for compensation funds or and loss statement of the applicable financial model. To specific provisions within rural electrification funds. incentivize mini-grid operators to find sites that are far Rules regulating existing compensation funds (e.g. for enough from the main grid, the depreciation time for all resettlement, way leaves) could be adjusted to allow intangible assets, such as project development costs, may compensation for assets not yet realised as well as be low (e.g., five years). those already depreciated. Box 3.10 Interconnection options for mini-grids in Uttar Pradesh (India), Tanzania, and Rwanda In Uttar Pradesh (India), the government has connection of isolated mini-grids, they do foresee adopted provisions for exit procedures to take effect three different scenarios: (i) the operator sells its upon arrival of the main grid. Operators may continue distribution grid to TANESCO and dismantles its to supply electricity to consumers at a mutually generation assets; (ii) the operator buys electricity agreed tariff (or at an imposed tariff in cases where from TANESCO and distributes and sells it to the project benefits from state government subsidy). its customers; and (iii) the operator generates They may also sell excess or surplus electricity to electricity, sells it to its customers, and feeds excess the distribution licensee at the interconnection point electricity back to TANESCO (EUEI-PDF, 2015). at the applicable feed-in tariff. Or they may elect to Rwanda. Regulations put in place in September supply all of their electricity to the said distribution 2015 cover the case in which mini-grids are licensee. Operators also have the option of eventually connected to the main grid. When this transferring ownership of their distribution network happens, the mini-grid operator has a range of to the distribution licensee upon mutual agreement options. It may become a small power producer on the depreciated value of assets (UPERC, 2016). and/or distributor, selling some of its assets to In 2009, Tanzania’s government incentivised the utility, or, if feasible, it may relocate its assets. independent power production by establishing (In fact, it is not prevented from doing both.) If an standardised power purchase agreements. agreement on the purchasing price or compensation Although the rules do not provide full protection for relocation cannot be reached, the regulator will from stranded investment in the event of main-grid provide binding conflict resolution. The decision on whether to interconnect or to seek to the tariff and the LCOE of the main grid. Figure 3.2 compensation should ideally depend on how the mini- illustrates the options that are most relevant for mini- grid’s levellised cost of generation (LCOE) compares grids under various conditions. Policy makers may 63 POLICIES AND REGULATIONS FOR PRIVATE SECTOR RENEWABLE ENERGY MINI-GRIDS Figure 3.2 Regulation options for main-grid connection to the mini-grid (depending on generation costs) Change into IPP with PPA, Generate, buy gap electricity from Take out movable assets and sell distribution grid to DNO main-grid, retail to customers, and receive compensation for sell excess to main grid remaining assets from DNO large Diesel generator small Electricity large Biomass small not stored large Solar mini-grids small Mini hydro Micro hydro Electricity stored in batteries Mini-grid cost of electricity, accounting Bulk cost of electricity Main-grid end- for feed-in taris (if any) on the main-grid customer taris Note: IPP = independent power producer; PPA = power purchase agreement; DNO = distribution network operator. adjust the main-grid’s LCOE limit beyond the main- from distributed generation (Box 3.11), with the caveat grid tariff through feed-in tariffs or by developing that this requirement will not apply where the utility standardised PPAs that oblige distribution network offers an attractive feed-in tariff for grid-connected operators on the main grid to purchase electricity small-scale renewables. Box 3.11 Interconnecting mini-grids: Supplying reliable electricity to underserved main-grid networks Private mini-grid operators can do more than DNOs, mini-grid operators tend to have decentralised just electrify rural communities. In some rural management structures in each village they serve. areas served by the national grid, the distribution As a result, demand usually increases over time and network operator (DNO) cannot earn profits owing conflicts are quickly settled. Reliable electricity is the to missing generation or transmission capacity, basis for customer satisfaction. or because of low demand and the high cost of The mini-grid operator may pay a small rent to collection. Under such circumstances, DNOs try the DNO for the right to use the distribution grid, to minimise their losses by reducing the hours thereby turning loss-making assets into profit- of electricity supply and cutting maintenance. making ones. The connected community of In Nigeria and India, for example, thousands of customers must agree to pay higher tariffs in return kilometres of distribution lines are not operated for reliable electricity. The income-generating at all or are underutilised, supplying low-quality opportunities opened up by reliable electricity power for just a few hours a day. supply, together with energy efficiency measures, Private mini-grid operators are often well positioned typically outweigh the disadvantages of the higher to take over these parts of the grid and run them as tariffs. Interconnected mini-grids require the interconnected mini-grids with their own generation consent of the DNO and the regulator. Dedicated assets (to power the grid whenever the main grid is regulation can facilitate and streamline private not available) and local management. In contrast to sector activities in this regard. 64 POLICIES AND REGULATIONS TO SUPPORT PRIVATE SECTOR MINI-GRIDS 3.4 POLICY MEASURES TO FACILITATE 3.4.1 MINI-GRID DEVELOPMENT PHASES ACCESS TO FINANCE AND FINANCING NEEDS Scaling-up mini-grid deployment requires efforts to Private mini-grids pass through different phases with attract capital into the sector. The role of governments varying financing needs until they are finally installed in making this happen can be three-fold: and commissioned. These phases can be broadly • First, to introduce dedicated measures to classified into project development, proof of concept, facilitate access to finance for mini-grid projects and project rollout. Figure 3.4 illustrates typical at different phases of development. This includes financing requirements at each phase for large (in the efforts to put in place an enabling policy and range of hundreds of kWs to MWs) and small mini-grid regulatory environment (as discussed elsewhere projects; these phased requirements will be discussed in this chapter) to help create a pipeline of in detail in this section. The two project scales not only bankable mini-grid projects, as well as measures have different capital requirements, especially in the to address specific gaps in financing.24 proof-of-concept and project rollout phases, but also use different financing structures. • Second, to take steps to mitigate specific risks of the mini-grid business model that negatively In the case of larger mini-grids (e.g., small-hydro and large brownfield projects, referred to below as ‘first affect its ability to raise financing. string’), each mini-grid is generally structured using a • Third, to design public financial support and the project finance scheme. The smaller mini-grids (e.g., delivery mechanism in a manner that leverages solar, biomass-based, and micro-hydro—referred private capital into the sector and ensures as ‘second string’) can be rolled out one after the sustainability of projects over their lifetime. other, deploying new financing approaches that have Figure 3.3 Examples of financing needs along the project-development chain PROJECT DEVELOPMENT PROOF OF CONCEPT PROJECT ROLLOUT Project developer / sponsor starts the Senior debt Small-hydro/large project development solar with its own equity Additional equity injection or wind/diesel Rural electrification Performance grants grants from goverments related to number of or large donors customers connected Venture capital Second- investors round equity Crowd injecting equity investors financing Senior debt PUBLIC PRIVATE Grants for Technical Awards feasibility assistance with prize Solar-battery/ studies grants money biomass/ micro-hydro Rural electrification Performance grants grants from goverments related to number of or large donors customers connected 24. Governments also influence the wider environment in ways that affect access to finance. Examples include the country’s attractiveness for investors (as determined by the ease of starting a business, land registration, investor protection, ability to enforce contracts, transparency, and so on) as well as local financial and fiscal regulations (such as currency inconvertibility and nontransferability, repatriation, taxation, import duties, and local content requirements) (IRENA, 2016). 65 POLICIES AND REGULATIONS FOR PRIVATE SECTOR RENEWABLE ENERGY MINI-GRIDS elements of both project and corporate finance. These later stage of project development, technical assistance approaches are currently being shaped and defined grants help the developers perform tasks that involve with more clarity as developers gain operational third-party consultancy such as GIS analyses, detailed experience and as their market and risk profiles come demand assessments, or environmental and social to be better understood. impact assessments (ESIAs). In some cases, technical Project-development phase. During the project- system design, administrative procedures and financial development phase, sites are selected, communities modelling can be done using the financial resources are contacted, demand is projected, mini-grid systems made available for technical assistance. The grants are designed, legal frameworks are analysed, and typically come directly from development banks or business models are developed. Finally, financial models development funds, such as the African Development are prepared, administrative approvals acquired, Bank’s Sustainable Energy Fund for Africa (SEFA) (Box and company structures established. This phase is 3.12) and the Overseas Private Investment Corporation’s typically financed by the equity of sponsors and project U.S.-Africa Clean Energy Finance Initiative (ACEF). developers. In some cases, grants for feasibility studies Alternatively, they may be channelled through concerned may be available, as in Mali (World Bank, 2012). In a government bodies (e.g., rural energy agencies). Box 3.12 The Sustainable Energy Fund for Africa (SEFA) SEFA is a USD 95 million facility funded by development of mini-grids, focused largely on the governments of Denmark, Italy, the United micro-hydro sites. The project includes detailed Kingdom, and the United States. It is hosted by feasibility studies of 20 selected hydro sites sized the African Development Bank. In 2015, SEFA between 5kW and 100kW, as well as rollout and awarded the Republic of Rwanda a grant of USD implementation plans that include tariff and 840 000 to support the scale-up of mini-grids business models for mini-grids. through a targeted intervention to strengthen SEFA has approved additional programs aimed at the enabling environment. The intervention will developing mini-grid policy in Mozambique and Niger, lay the foundation for co-financing private sector with an additional four-country program in the pipeline. Source: AfDB, 2016. The most innovative mini-grid operational models are and financial gap by making expert advice available often deployed by small, young companies that have at no charge and reducing the costs associated with very limited budgets. Typically, such companies do project preparation and feasibility analysis. not even have enough capital to provide their equity The project-development phase is a crucial step that contribution to a publicly supported project or to be strongly influences the development of a project pipeline able to afford the administrative cost of the above- for sustainable mini-grids that are well-positioned and mentioned support instruments. In such contexts, equipped to raise financing during the remaining phases. support instruments such as African Development Policy makers can take several measures, summarised Bank’s Market Intelligence and Business Development in Table 3.1, to help developers in this phase in gaining Support (part of the bank’s Green Mini-Grid Market access to financing, including equity, grants for technical Development Program) can help close the knowledge assistance and feasibility studies. 66 POLICIES AND REGULATIONS TO SUPPORT PRIVATE SECTOR MINI-GRIDS Table 3.1 Measures to facilitate access to finance during project development Phase Financing type Measures • Fulfil the other three conditions to attract private developers’ interest in mini-grid development. • Provide market information on early-stage financing sources and data needed to Equity perform initial market assessments and feasibility studies (e.g., number of unelectrified villages, potential anchor customers, income distribution). • Undertake regular consultations with private sector mini-grid developers to identify policy and regulatory risks to business models. Grants for • Prioritise mini-grids as a key pillar of the electrification strategy to attract international feasibility studies development funds for projects (either directly or channelled through public agencies). • Cooperate closely with regional and global funding facilities to attract early-stage grants using dedicated frameworks, such as rural electrification funds, to pool together international and local financing, and to channel funds to projects. PROJECT DEVELOPMENT PROJECT Technical • Set up dedicated help desks or extend support through incubation centres, providing assistance grants advice to mini-grid developers during project development. Project rollout phase. Following the project- In the second string, mini-grids are faced with an development phase, the financing flow splits into two extensive proof-of-concept phase. They have to prove specific strings: their ability to generate adequate revenues against In the first string (large mini-grids), projects predicted costs. Therefore, the proof-of-concept phase typically have a short proof-of-concept phase that is a major part of the due-diligence process required to is generally theoretical in nature and integrated qualify for further equity and debt finance. In the proof- into the due-diligence process. This is possible of-concept phase, the mini-grid developer implements because the individual components of the project, as a first system and operates it under stringent cost well as the demand for electricity, are already well and revenue monitoring. Typically, the phase is understood. This applies especially to small- implemented using the developer’s or sponsors’ own hydro projects and large brownfield projects in equity. Alternatively, prize money from business plan 25 which large diesel mini-grids are integrated with competitions may be used. Husk Power Systems for renewables. Many of the brownfield projects tend instance, won the CISCO and Draper Fisher Jurvetson to have anchor clients, such as a state utility or global business plan competition in 2009, raising USD industrial off-taker, which provides some degree 250,000 and financing their proof of concept. Some of certainty about demand and future cash international development organisations award grants flows. Since the demand for and the generation to co-finance pilot projects. The related funds may either characteristics of solar PV/wind are well known, be assigned to a specific country (as with certain projects the proof-of-concept phase is generally replaced funded by the European Union or the United Kingdom’s by an extended theoretical due-diligence process Department for International Development) or to a covering various risks (discussed in detail further wider geographic region, but in the latter case they may on) and mitigation approaches. In this first string, be limited by constraints relating to company size and the due-diligence process can be very resource- financing structure (e.g., the develoPPP program). intensive. For that reason, additional equity is often Table 3.2 provides an overview of the measures that needed. Some development banks and development governments can take to facilitate access to finance, funds award technical assistance grants to support both equity and grants, during the proof-of-concept the due-diligence process. phase for both large and small mini-grids. 25. Examples of such competitions are the Lighting Rural Tanzania Competition of the Rural Energy Agency and the Renewable Energy Business Plan Competition managed by ECREEE and Climate Technology Initiative. 67 POLICIES AND REGULATIONS FOR PRIVATE SECTOR RENEWABLE ENERGY MINI-GRIDS Table 3.2 Measures to facilitate access to finance during the proof-of-concept phase Phase Financing type Measures • Easy repatriation of money and low withholding tax to attract international investors. Equity • Indexation of tariffs to diesel price, foreign exchange rate, and inflation. • Close cooperation with national, regional, and global funding facilities to attract Technical assistance technical assistance grants to be disbursed to projects through dedicated frameworks, (String 1) grants for due such as rural electrification funds. Proof of concept diligence • Creation of a framework for private sector mini-grids to raise direct technical assistance grants from international development funds. • Easy repatriation of money and low withholding tax to attract international investors. Equity • Indexation of tariffs to diesel price, foreign exchange rate, and inflation. • Close cooperation with national, regional and global funding facilities to attract grants (String 2) Grants for first suitable for proof of concept of small mini-grids. system(s) Proof of concept • National business plan competitions. Proof-of-concept/pilot phase. After a successful dedicated funding agencies that channel both local proof of concept, the company must attract grants and international development finance. and equity—or a mix of grant, equity, and debt—to Mini-grid developers in the second string, having enter the project rollout phase. succeeded in developing a scalable mini-grid business Mini-grid developers in the first string—that is, model and proven their concept, can begin to attract with comparatively large generation assets and venture capital in the form of equity (Box 3.13). Equity distribution networks—often use processes that investors generally look for businesses with quick cash resemble those used for grid-connected renewable return, which is reputed to be an indicator of low risk energy projects. Equity investors and debt financiers and good scalability of the model. Thus, product sales tend to be attracted to mini-grid projects that are able, businesses (e.g., solar home system companies) are technically and legally, to sell excess power to the preferred over infrastructure operations and electricity utility under a power purchase agreement when and sales businesses (e.g., mini-grids). The largest if the national grid arrives. Preferably such sales are equity success so far among second string mini-grid in hard currency, with clauses pertaining to minimum companies was scored by Powerhive in Kenya, which availability of the grid, combined with government acquired USD 20 million in early 2016. The financing guarantees. In some cases, as in Tanzania, projects also was led by Prelude Ventures, with participation from use balance-sheet financing from parent companies Caterpillar Ventures, Total Energy Ventures, Tao Capital active in other core industries (e.g., tea, coffee, sugar). Partners, and Pi Investments. The round came soon In addition, they make use of grant funding for capital after a USD 11 million equity investment by Enel Green investments in equipment and/or performance grants Power to build and operate a 1 MW portfolio of mini- (per connection) from the national rural electrification grids in 100 villages serving approximately 90,000 agency.26 These funds are usually administered by people in western Kenya (ESI, 2015). 26. An example of a performance grant is REA Tanzania’s Performance Grant. Under REA’s TEDAP program, grants covered up to USD 500 per connection and up to 80% of distribution and metering costs in rural areas. 68 POLICIES AND REGULATIONS TO SUPPORT PRIVATE SECTOR MINI-GRIDS Box 3.13 Venture capital in the mini-grid sector The sources of venture capital in the mini-grid in the market, putting them in a strong position to sector can be divided into four groups: impose conditions. Such conditions may include • Investors with a utility background, such as reevaluation of demand, additional documentation Enel Green Power or Engie, aiming to be at the of design steps or of quality management, forefront as frontier markets move towards a government approvals, and revenue verifications, all new breakthrough in electricity supply. of which are designed to reduce investment risk. • Investors coming from an energy product Some equity investors link their engagement to market, such as Caterpillar, that see an a successful acquisition of debt. However, as the opportunity to sell additional products. availability of equity is typically itself a condition for debt acquisition, equity investors and debt • Renewable energy project developers, such as financiers sometimes aim to close simultaneously. RP Global or First Solar, that want to develop The equity acquisition process can take up to new business models for electricity sales. 12 months or more, and debt acquisition and • Impact investors with a financial background, simultaneous closings usually take even longer, as such as Acumen or Bamboo Finance, and debt financiers require even more proof of concept impact-driven foundations, such as Shell, Doen, and more security than do most equity investors. or Rockefeller. Under such circumstances, project developers Usually, utilities and energy-product investors are typically contact potential venture capitalists and willing to enter at an earlier stage than investors with lenders early in the project-development cycle, a finance background. Foundations may be willing to armed with immature business and financial take higher risks if convinced of the socioeconomic models, which may be counterproductive since it impact of certain business models. Generally, there causes investors to view the sector as a whole as is limited competition between venture capitalists unattractive. Recently, crowdfunding has emerge as a complementary expensive and impose fewer demands and expectations solution to traditional methods of raising financing for on fund-seekers than conventional private, public, or smaller mini-grids (Box 3.14). Although the amounts charitable sources, and financing rounds can be closed raised through crowdfunding are still relatively small and more quickly. Successful adoption of this concept has the legal and regulatory regimes governing the sector already been demonstrated by organisations such are still being worked out, the appeal is growing. Funds as SunFunder (Tanzania and Uganda) and Mera Gao raised over crowdfunding platforms are typically less Power (India) (IIED, 2015). 69 POLICIES AND REGULATIONS FOR PRIVATE SECTOR RENEWABLE ENERGY MINI-GRIDS Box 3.14 Crowdfunding complementing traditional finance: The case of Mlinda and Mobile Solarkraftwerke Afrika Mlinda, a not-for-profit organisation, installs USD 74 000 and USD 82 000 through crowdfunding. 150W–225W micro grids for households in To the extent that the debt is paid off on an annual basis Sunderbans and remote tribal areas of West Bengal by village-level joint liability groups, some portion of such as Purulia. The projects are owned by Mlinda, the collateral amount is freed up to be channelled back and their capital expenses are raised in form of both into the project for scale-up (CLEAN, 2015). equity and debt. Although the organisation does Mobile Solarkraftwerke Afrika GmbH & Co. KG benefit from traditional lenders such as NABARD (a was able to obtain funding through Bettervest, a rural bank), United Bank of India, India, the Climate crowdfunding platform. The funding goal of EUR Group and CSR funds. It has also been raising funds 107 700 was met within four days by 174 investors. from crowdfunding platforms such as Milaap. Investors could start investing as little as EUR 100, The organisation raises debt finance at interest rates with an expected annual return of 9% over seven of 4%–5%. Grants are obtained to fund smart meters, years. The project now provides electricity to an capacity building, local repair and maintenance, and isolated rural village Mourdiah with no connection Mlinda’s overhead. Thus far, Mlinda has raised between to the power grid (Akerboom, 2015). As highlighted earlier, the ability of projects to raise both additional measures that governments can take to facilitate international and domestic equity and debt depends access to finance for mini-grids. Table 3.3 provides an greatly on how well risks are managed and how public overview of the measures that governments can take to financial support is designed and delivered. The remainder help large and small mini-grids access financing, including of this section tackles these two aspects and highlights equity, grants and debt, during project rollout. Table 3.3 Measures to facilitate access to finance during project rollout Phase Financing type Measures Performance grants/ • Set up a rural electrification fund replenished from national budgets and levies, and by subsidy per connected international donors. Ensure good governance of the fund. customer or operational/ • Cooperate with international donors to attract grants directly for projects. public private partnership • Ensure easy repatriation of funds and low withholding tax to attract international Equity investors. • Permit tariffs to be indexed to diesel price, foreign exchange rate, and inflation. • Ensure easy repatriation of funds. • Address identified policy and regulatory risks and protect against retroactive changes International debt to support measures. (string 1) • Consider providing partial default guarantees to mini-grid projects to leverage debt Project rollout Project financing. • Enable low interest rates for local currency loans with long tenures using dedicated funds—e.g., funds channelled through the central bank to local commercial banks. Domestic debt • Build capacity in local commercial banks on mini-grid financing. • Consider using partial default guarantees to enable project financing structures other than corporate financing. Performance grants/subsidy per connected customer or As above public private partnership Equity As above • Easy repatriation of funds. Crowdfunding • Review existing regulations on crowdfunding from local and international lenders. (string 2) International debt As above Project rollout Project Domestic debt As above 70 POLICIES AND REGULATIONS TO SUPPORT PRIVATE SECTOR MINI-GRIDS 3.4.2 RISK MITIGATION FOR LARGE AND All key actors involved in mini-grid development— SMALL MINI-GRIDS including financing institutions, public agencies, and A wide range of investment risks accompany the project sponsors and developers—can take measures phases of mini-grid development and operation. The to mitigate some of these risks. three major risks faced by mini-grids (Figure 3.5) are: The discussion here will focus on measures that • Volume/off-take risk governments can take to derisk elements of the mini- • Policy and regulatory risk grid business model that could facilitate access to • Currency-related risk. financing for projects. Figure 3.4 Key risks for mini-grids • Over- / under-design of system due to incorrect demand assessment • Ability to pay influenced by environmental or economic eects • Willingness to pay influenced by political interference Volume risk/ o-take risk Political / Currency- regulatory risk related risk • Encroachment of main grid • Fluctuation in foreign exchange rate • Change of tari regulation and licensing rules • Hyperinflation For isolated mini-grid projects in the first string, For mini-grids connected to the main grid, where renewable energy capacity is added to government-backed power purchase agreements existing diesel generation, a track record of energy in hard currency27 will mitigate, to a certain extent, demand, revenues, and costs exists, thus mitigating two of the three main risks in renewable energy– volume/off-take risk to a certain extent. Additionally, based mini-grid operations—namely currency and it is not uncommon for large mini-grids to operate volume/off-take risk. The reduction in risk is only ‘to under concession agreements, which goes a long a certain extent’ because tariffs for bulk sales to the way towards mitigating the risks of untimely arrival national utility are generally considerably lower than of the main grid. The only operational risks that retail tariffs. Thus, while it is true that the main grid cannot be mitigated are those related to unanticipated represents a 24/7 off-taker, tariffs may still not be high regulatory changes (e.g., affecting the tariffs that enough for revenues to cover debt service. Project mini-grids can charge to consumers) and currency- developers planning to sell to the national utility may related risks. Local-currency debt financing want to investigate the off-taker risk associated with and hedging instruments can be combined to the national utility buyer. Many national utilities have address the latter. a history of late payments to small power producers. 27. The issue of exchange-rate risk is a critical one. Most mini-grids denominate their capital expenditures in hard currency, while revenues from electricity sales arrive in local currency, making it extremely difficult to service hard currency loans and remunerate equity investors. As many currencies are volatile, projecting revenues becomes challenging. 71 POLICIES AND REGULATIONS FOR PRIVATE SECTOR RENEWABLE ENERGY MINI-GRIDS The remaining operational risk is political risk, which can capacity can be avoided. Engineering decisions should partly be mitigated by political risk insurance through allow for scaling of the renewable energy portion as the Multilateral Investment Guarantee Agency, the load materializes. This includes choosing equipment Overseas Private Investment Corporation, export credit that can be ‘stacked’ or operated in parallel as new agencies, or private insurers (ARE, 2015), together with renewable energy generation and storage are added. contractual arrangements under the power purchase The currency risk can be mitigated either by using agreement. These conditions help developers secure loans in local currency or by combining hard-currency debt capital from international development banks. loans with hedging instruments such as the one With all their assets in one place, first-string projects offered by The Currency Exchange Fund (TCX). Up have relatively easy access to project finance without to now, both strategies have resulted in extremely the need for additional collateral. high interest rates and, consequently, a high LCOE, In the second string of smaller, isolated mini-grids, the which often cannot be matched with electricity tariffs above-mentioned payment guarantees and power acceptable to customers and regulatory authorities, purchase agreements are typically not available; rendering projects financially unviable. As the capital neither are hard currency cash flows. This means that market cannot presently offer any adequate mitigation the three main risks in mini-grid operation need to be for foreign-exchange risk on second-string projects, mitigated using other measures. governments and central banks may fill the gap with The volume risk can be mitigated to a certain extent low-interest debt in local currency channelled through by accurate demand assessments and conservative commercial banks to mini-grid projects (Box 3.15). dimensioning of renewable energy investments (solar, The political/regulatory risk, as discussed earlier, can wind, etc.), while providing for sufficient generation be partly mitigated by political risk insurance, but also capacity (e.g., diesel generators) in hybrid systems. by a robust policy and regulatory framework for mini- This way, a risky oversizing of the renewable generation grids backed by demonstrated political commitment. Box 3.15 Channelling low-interest, local-currency debt for mini-grid projects The predominantly small companies active in the banks, which typically begins in the range of USD second string market segment cannot provide the 5–10 million in debt capital, leaving local developers security and do not have the balance sheets required with local commercial banks. Being accustomed for substantial corporate finance, especially in to handling small amounts of debt finance, these scenarios where their business model has not been local commercial banks could close the financing proven. Because assets are widely distributed, gap if adequate subordinated debt tranches from banks are reluctant to accept them as collateral. government funds were available. Dedicated low-interest loans in local currency, In this context, cooperation between banks and offered by central banks through local commercial international development partners to provide banks, can be a boon to local developers of small blended financing packages consisting of grants and mini-grids. International developers set up mini- debt would facilitate mini-grid development. The grid companies as special purpose vehicles that packaging of grants and debt has been successfully must cover their entire overhead, which requires tested in some cases. In Bangladesh, IDCOL provides a certain scale of business activity. By contrast, a grant equivalent to 50% of the mini-grid’s capital local companies can usually blend the mini-grid’s expenditure, coupled with a 10-year, local-currency overhead costs into their existing business. Because loan for 30% of the capital at an interest rate of 6%. they require less debt, such local projects often fall In India, Mlinda Foundation is packaging grants with below the threshold of international development a loan facility from NABARD, a rural bank. 72 POLICIES AND REGULATIONS TO SUPPORT PRIVATE SECTOR MINI-GRIDS The remainder of this section sums up the similar institution to make government guarantees recommendations for mitigating risk in mini-grid projects. bankable. • In the case of local-currency loans, central banks • Where a government is willing to issue a 100% can set up subordinated debt facilities at low guarantee, extremely low-cost debt capital can interest rates and with long tenures. These can be attracted (e.g., from the IRENA–Abu Dhabi be managed by local commercial banks well- Fund for Development Project Facility). Relieving trained in handling mini-grid debt financing. One the mini-grid operator of all debt-related risk may example of such a structure is the Micro, Small not be advisable, however, as it is important that and Medium Size Enterprise Development Fund private developers have some ‘skin in the game’. (MSMEDF) of the Central Bank of Nigeria, which In such cases, the government may seek some is also accessible for mini-grid projects. In Nepal, collateral from the developer. examples are provided by Himalayan Bank Limited • Most mini-grid developers would prefer local and Clean Energy Development Bank Ltd. currency channelled through a local bank finance • Government guarantees can be provided as partial under concessional conditions over international default guarantees covering 50–80% of any loss bank finance in hard currency combined with that a lender might incur in case a borrower foreign-exchange hedging. defaults. The lender could cover its remaining exposure through project-related collateral, such 3.4.3. PUBLIC FINANCIAL SUPPORT AND as the assets of the mini-grid systems. Such a DELIVERY MECHANISMS combination may even apply to small distributed mini-grids. Instead of setting up default The foregoing discussion introduced several options guarantees by themselves, governments may for public financial support of mini-grid development choose to liaise with international development and implementation. Most of that support involves agencies that already offer this type of guarantee. some form of government intervention using the One of the first actors in this segment is the U.S. government’s own funds or grants from donor Agency for International Development, which organisations. In the early stages of mini-grid market extends U.S. government guarantees under the development and when political pressure may be Power Africa Initiative. In some cases, mini-grid exerted to set tariffs below cost-recovery levels, developers may need to back up government financial support is often needed to buy down tariffs. guarantees with additional guarantees from the Figure 3.6 provides an example of the effect of different Multilateral Investment Guarantee Agency or a types of support on a solar-hybrid mini-grid tariff. Figure 3.5 Illustration of effect of financial support on tariffs for a 300 kW solar-battery-diesel mini-grid USD/kWh 1.15 1.10 1.05 1.00 0.75 0.55 0.85 0.95 0.65 0.70 0.50 0.80 0.60 0.90 OPTIONS Grant (distribution assets) Grant + technical assistance Grant + technical assistance + soft loan (gener. assets) Source: Adapted from NESP, 2016. 73 POLICIES AND REGULATIONS FOR PRIVATE SECTOR RENEWABLE ENERGY MINI-GRIDS Grants for mini-grid development. Grants have growing electricity demand of connected customers been an important mechanism in the development without the need for additional subsidies, no grants of mini-grids. They have been used to lower the end- should be used for generation assets. If this rule is customer tariff. In practice, the business models for not followed, tariffs will jump as soon as equity and mini-grid electrification have some natural limitations debt are obtained to extend the system. One way to in terms of how much grant they can absorb: mitigate this risk is to use grants only to fund non- One of those limits is reached when grants compromise generating assets such as distribution networks, the company’s commitment to deliver quality results. metering, and buildings. Full grant coverage of project-development costs A third limit is related to the costs of operations and (including the company’s own cost) would be likely to maintenance and administration, which should be result in such a compromise, just as 100% risk coverage covered by tariffs to avoid ongoing cross-subsidisation, through government guarantees would probably which may inhibit large-scale mini-grid development erode the company’s performance. With 100% (Section 3.2 and Box 3.16). Subsidies on consumption guarantees, a private company has too little financial represent a major burden for the government with incentive to manage risks and please customers. substantial revenue risk for the private sector. A second limit can be found in the level of subsidy These limitations mean that grants should not be provided to reduce the company’s capital expenditure. viewed as an alternative to tariffs that are higher than If the private operator is to be able to meet the those of the main grid. Box 3.16 General design principles for subsidies No subsidy on consumption (per kWh). While support necessary to deliver services at specified capital costs may be subsidised, recurrent tariff tariffs, among others. In Senegal, for example, a subsidies should be avoided, particularly in markets hybrid mini-grids bidding program with a fixed where projects must struggle to prove bankability. capital subsidy had a minimum tender requirement One-off subsidies may be provided to ensure cost- of 8 500 connections, but the winning bidder recovery at depressed tariff levels. But spreading pledged to connect 21 800. For a small project subsidies per unit generated over all or part of the or for new entrants, tenders may not be the most system’s lifetime increases risk for investments into suitable approach. the project (Tenenbaum et al., 2014). Catalysing additional financing. Subsidies to Competition between mini-grid developers. catalyse complementary financing (i.e., subsidies Inducing competition for financial support between from concessional and public sources) should potential developers can improve effectiveness and leverage capital from beneficiary or promoter. It is efficiency. In countries where competitive tenders bad practice for subsidies to cover the entire cost are being launched for mini-grid development, bids of the system. Where project financing through are received on a wide range of parameters. These commercial sources is sought, it may be necessary parameters are often based on the technology for the public body to provide derisking tools, as used, tariffs for services, and the level of public discussed elsewhere in this chapter. Source: Based on SADC RERA, 2013. The efficient delivery of public support through by-step basis (wherein it is applied for at the end grants should be based on a transparent selection of each development phase) or be integrated into a procedure. The support may be awarded on a step- consolidated competitive process (wherein the support 74 POLICIES AND REGULATIONS TO SUPPORT PRIVATE SECTOR MINI-GRIDS linked to the next development phase is automatically grant is lost just because the beneficiary does not have unlocked upon achievement of the preceding phase). access to the next grant level. Finally, with a linked Such an approach can ensure that a project is well approach the administrative procedure of selecting developed and can be fully implemented without winners can be streamlined and administrative effort waiting for the next phase or instrument of public minimised, since repeated selection processes with support to be put in place. Additionally, under the different procedures are avoided. One example of consolidated approach, the mini-grid developer will such an approach is the Guided Idea Competition strive to deliver on agreed targets so as to access the developed and implemented by the Nigerian Energy next grant stage. On the other hand, no early-stage Support Programme (NESP) (Box 3.17). Box 3.17 The Guided Idea Competition: A new approach to awarding grants in mini-grids The Nigerian Energy Support Programme has a full business plan under a call for proposals to developed a new approach to support mini-grid obtain a grant. projects. The Guided Idea Competition is a three- • Step 3. The winners of the call for proposals stage process: receive individual technical assistance in • Step 1. General training on mini-grid project assessing demand for electricity in the selected development is offered to private sector communities; designing the mini-grids, power companies. The training is followed by a call stations, and business strategy (operations for expressions of interest in the form of a and maintenance, collection, metering, theft three-page application covering the applicant’s protection, community management, and so on); experience in the sector, financial stability of licensing; financial modelling; and presentation the company, project idea, and willingness to to investors and banks. The grant is used to inject equity into the project. finance the distribution network according • Step 2. A number of applicants are selected to the mini-grid operator’s requirements. from the expressions of interest. These receive Ownership of the distribution assets lies with in-depth training in system simulation and the government, with the mini-grid operator financial modelling of mini-grids. Applicants holding the right to use the network. that complete the training are invited to submit The first projects are moving towards financial close. Other financial instruments. To unlock debt, amount may be reduced to the point that lending dedicated instruments can be deployed, including: requirements cannot be met in one step. • Subordinated debt (also known as junior debt) • Nonperforming debt buyouts. As with a guarantee is debt that is paid after higher-ranking (senior) program, a development partner or government debts, when a company falls into liquidation. commits itself to buying nonperforming debt from The use of public funds as subordinated debt commercial banks in order to reduce the credit risk can reduce risk for commercial banks and other of their lending to mini-grids. providers of senior debt. Subordinated debt, or • Third-party collateralisation. This form of debt that is converted into equity under certain collateralisation marshals a development partner’s conditions, can make up for missing equity in collateral (e.g., national utility assets) to enable very small operations and thereby unlock senior a mini-grid developer to qualify for corporate debt. The disadvantage is that the senior debt finance from a local bank. 75 POLICIES AND REGULATIONS FOR PRIVATE SECTOR RENEWABLE ENERGY MINI-GRIDS • Syndicated loans. Considering the high capital the government can be used to reduce the capital expense of large-scale mini-grids, syndicated loans investments demanded of private operators.28 The may offer an important pathway wherein several Nigerian Energy Support Programme (NESP) is trying financial institutions jointly finance the system. this approach in the mini-grid sector in cooperation In such cases, risk-sharing and the combined with five different state governments, with support resources and competencies of financing from the federal government. While NESP is injecting institutions may facilitate project implementation international grants to finance distribution networks (European Microfinance Platform, 2014). that will be transferred to state government, some To attract debt and equity investors, traditional state governments are already preparing to extend infrastructure development models, such as public- the program using their own funds. Another form of private partnerships (PPP) and concessions, can also PPP approach for mini-grids is described in Box 3.18. be applied to mini-grid development. The goal is to PPPs could represent a stepping stone between a reduce risks, improve project bankability and improve purely government-driven mini-grid approach and the delivery of financial support. one led by IPPs. By sharing risk within a PPP, private Public-private partnership (PPP) models in which operators for whom the IPP route would still be too ownership of publicly financed assets remains with risky can engage in mini-grid development. Box 3.18 ESCAP’s pro-poor public-private partnership approach Various models of public-private partnership may be Figure 3.6 Illustration of UNESCAP's PPP approach appropriate depending on the circumstances in which UN ESCAP GOVERNMENT mini-grid infrastructure is to be developed. The pro-poor Grant funding Government grant PPP model is being tested in Nepal and the Lao People’s and policy purchases utility oversight shares on the Democratic Republic. In the model, a special purpose community‘s behalf vehicle for maintenance and operation is established with Policy support a 60% private sector stake and 40% community stake. Community mobiliser / NGO Establish community interests and collaborate with private sector Unlike a conventional PPP model, the public sector does not own any assets and the SPV has complete ownership. Utility Tariffs are set to cover private and community investment, PRIVATE SECTOR COMMUNITY Equity investment In-kind contribution operations and maintenance costs, and other community Service provisions activities. Revenues are used by the cooperative for Co-ownership & ROI Community employment Co-ownership & ROI community development and to subsidise tariff rates. ROI = return on investment; NGO = nongovernmental organisation; PPP = public-private partnership. Demonstration projects, involving solar PV and micro-hydro plants of 16–23 kW capacity, have been developed in Nepal (Makwanpur and Tanahun districts) and Lao PDR (Xayabouly province). The model’s financing has fixed components, specifically the tariff rate, and an 80% grant component to meet required return on investment and cash flows. Economies of scale and village clusters are necessary to ensure financial viability and to reduce the grant share. The major issue is not the availability of capital, but the lack of mechanisms to access funds. To address this, alternative financing approaches are being analysed—among them impact investment networks, fund, clean energy credit guarantees, micro-finance, green bonds, and policy tools (feed-in tariffs, transparent PPA/IPP policy frameworks). Source: UNESCAP. 28. Financial institutions may be concerned that government ownership of distribution grids may make maintenance and repair more complicated. This concern can be overcome if the right-of-usage contract between the government and the operator specifies that maintenance and repair of the distribution assets are the operator’s responsibility. 76 POLICIES AND REGULATIONS TO SUPPORT PRIVATE SECTOR MINI-GRIDS Argentina and Colombia are among the Latin American electrification. With support from the Inter-American countries that have extensive experience with the Development Bank, Colombia has recently developed concessional model in roads and telecommunications, an innovative way to scale up mini-grid implementation experience that they are now applying to rural with enhanced private sector participation (Box 3.19). Box 3.19 Scaling up investments in isolated renewable energy–based mini-grid systems in Colombia About 60 percent of Colombia's territory is not from the private sector to mainstream renewable connected to the electricity grid, and roughly 1.8 energy–based mini-grid projects and engage local million of its people rely on limited and scattered financial institutions. The IDB loan aims to support power services. Recently, the Inter-American private companies that supply and administer Development Bank has announced the approval public electricity services, as well as providers of of a loan of USD 9.3 million to promote private renewable energy technology that have a history investment in the generation of renewable energy with mini-grids. The final objective is to develop a in isolated/unconnected areas of Colombia. The model that can be replicated and scaled up across project is receiving funding from international the region. The program is one of the innovative donors and is part of IDB’s efforts to support mechanisms for public-private financing that Bancoldex, a commercial bank that operates as the IDB has been promoting to increase private Colombia’s entrepreneurial development and investment in renewable energy. The operation, export-import bank. Bancoldex will act as the which will draw on Climate Investment Funds, implementing agency for the programme. has a payout period of five years, with a 10.5-year The aim of the investment strategy is to use grace period and an interest rate fixed at 0.75 concessional financing to mobilize investment percent. Source: IDB, 2016. In deciding where to set the level of public support household connections, and meters can be 100% and how to design associated delivery mechanisms, grant financed, as these typically do not need to policy makers may wish to keep in mind the following be extended as the demand of each household considerations, offered as a summary of this section. increases. • Any grant related to second-string rollouts should • With respect to performance-related grants, a take the private mini-grid operator beyond the fixed grant amount per customer connected leads break-even point. The grant should fund enough mini-grid developers to focus first on areas with customer connections to permit the mini-grid high population density. If local authorities want operator to generate sufficient revenue to cover to attract mini-grid developers to less densely all of its costs, including overhead. As a rule of populated areas, the grant should be linked to the thumb, that level is typically in the range of 5 000 cost of the distribution network and to a tendering rural households. procedure. Alternatively, the distribution network • If the mini-grid is to meet increasing demand could be installed directly by the grantor. through extension of generation assets, while • Grants should not be seen as an alternative to keeping retail tariffs constant, grants cannot be tariffs that are higher than those charged by used for generation assets. Instead, connection- the main grid. This is important for ensuring the related assets such as distribution networks, viability of private mini-grid projects and avoiding 77 POLICIES AND REGULATIONS FOR PRIVATE SECTOR RENEWABLE ENERGY MINI-GRIDS unsustainable public subsidisation that ultimately A well-balanced policy definition can optimize sector inhibits large-scale deployment of mini-grids. development under the given constraints. In this effort, • Subsidies from concessional and public sources an understanding of how policy and regulations affect should leverage capital from the project promoter different technology-tier combinations is paramount. or beneficiary, as well as from commercial financial This section sets out to improve that understanding institutions. With respect to the latter, derisking by using the four key conditions discussed in the tools and dedicated debt funds will be needed to previous sections—namely legal and licensing bridge the financing gap. provisions, cost recovery and tariff regulation, the • PPPs can be a stepping stone between a purely risks associated with arrival of the main grid, and government-driven mini-grid approach and one measures to facilitate access to finance. In each case, led by IPPs. key points are highlighted. 3.5 POLICY DESIGN FOR DIFFERENT 3.5.1 SOLAR DC (TIERS 1–3) COMBINATIONS OF TECHNOLOGY Solar DC mini-grid businesses rely on their ability to AND SERVICE TIER serve unserved or underserved markets at the lowest By designing mini-grid policy and regulation that possible cost. Modular technology and a less capital precisely meets the requirements of certain delivery intensive model allows rapid scale-up and economies models, policy makers can direct private investment of scale. The following policy and regulatory conditions streams to certain combinations of technology and are known to affect solar DC mini-grids substantially. tier. In this way, policy makers can not only influence Legal and licensing provisions. The viability the pace of rural electrification, but also the level of of solar DC mini-grid projects is highly sensitive to access, the extent of public spending, and, to some project development costs, as these are distributed extent, customer satisfaction. over fewer kWhs generated. To keep costs low, All these aspects are related, and improvements in many solar DC mini-grids operate in an environment one may come at the expense of another. For instance, where regulatory interaction is minimal—that is, a policy focus on solar DC mini-grids will result in where mini-grids of very small scale (usually under 3 extremely fast electrification with a low requirement kW) are exempted from licensing requirements. The for government spending but will reach only Tier 2 exemption must be explicit, enshrined in legislation, or 3 of service. In fact, once installed, these systems and offered to projects that fall below a predefined, cannot easily be upgraded to a higher tier without technology-specific threshold. DC mini-grids should changes in supply, distribution, and consumption. further be exempted from the national grid codes, which makes sense because they are not technically In contrast, a policy focus on small-hydro mini- compatible with the grid. grids would probably yield a much lower pace of electrification and require public funds for technical Project-specific regulatory requirements, such as assistance, tangible assets, and guarantees of long- ESIAs, also introduce costs. Conducting an ESIA term debt financing. The service tier achieved would requires hiring a certified consultant. Additionally, likely be higher than in the case of solar DC mini-grids the environmental agency may charge a fee for its and would provide greater customer satisfaction, services, which may include the visit by public officials since the installed capacity and available energy can to the site during the approval process as well as be increased at lower costs. All other AC technology annual inspections. Such requirements, if any, should options have their own specificities but generally can be tailored to project size, thus reducing burdens on be located between the two just described. smaller projects. 78 POLICIES AND REGULATIONS TO SUPPORT PRIVATE SECTOR MINI-GRIDS In Tanzania, for instance, the National Environment on) and competition with stand-alone solutions such Management Council (NEMC) decides on a case- as solar home systems. In Bangladesh, for example, by-case basis if a full ESIA, a simplified ESIA, or no solar DC mini-grids have to compete with solar ESIA is needed. Since the environmental and social home systems that benefit from different forms of footprint of solar DC mini-grids can be largely similar financial support. Under such circumstances, solar across a province or a country, development costs home systems can push small mini-grids out of local can be reduced by conducting a one-time benchmark markets with high population density where, under ESIA to assess impacts. Depending on the results natural market conditions, mini-grid solutions might obtained, this may be followed by waiving ESIA be more suitable. In general, a level playing field for requirements entirely or minimising and standardising various technologies is needed, ideally based on them for similar projects in the pipeline. Additionally a comprehensive rural electrification strategy, to or alternatively, developers may be asked to agree to allow the solutions that are most appropriate from comply with environmental regulations, the violation the perspective of cost and service delivery to be of which would incur a penalty. deployed. The goals of recovering costs and earning risk- equivalent margins also benefit from policy measures • Solar DC mini-grids below a specified that reduce project development and installation capacity should be exempted from regulatory costs. Campaigns to raise awareness and inform requirements (e.g., tariff approval). customers about the capabilities of solar energy • Based on assessments conducted for in unelectrified rural areas are major costs for solar benchmarked projects, ESIA requirements DC mini-grid projects. Campaigns supported by may either be waived entirely or minimised local governing bodies can play an important role in and standardised for other projects in the overcoming initial barriers to uptake. pipeline. With small-scale mini-grids, tax exemptions for system components and accessories (such as energy- efficient DC appliances) can have a marked impact Cost recovery and tariff regulation. Tariff on costs. Access to DC appliances can keep capacity structures for solar DC mini-grids are generally demand low and make it possible to supply higher designed to be in line with a household’s existing electricity services (such as lighting, television, fans).29 spending on energy for lighting, mobile phone DC appliances have yet to become off-the-shelf charging, and so on. Imposing standardised tariff products. Framing a clear policy towards DC mini- regulations, such as uniform national tariffs, would grids would create incentives for the private sector inhibit operators’ ability to tailor payment structures, and create a downstream market for appliances. possibly reducing the affordability of services and Targeted efforts to reduce appliance costs, such as viability of the project. Even if they are initially centralising procurement at the village or provincial exempted from tariff regulation, operators remain level, could also be considered. concerned that it could be imposed retroactively. On the operational side, operators are also looking In the early years of operation, solar DC mini-grid at technology options to reduce costs. An example is projects are particularly vulnerable to external the use of ‘mobile money’ for tariff collection, which factors that can affect cost recovery. These include represents a cost-effective mechanism for collecting uncertainty about grid extension (discussed further and handling payments. In countries like Kenya and 29. In the case of SolarIC in Bangladesh, generation and storage units operate at the 48V DC level, whereas distribution to households is at 220V. This allows most common AC appliances to be used, as they can run on DC power as long as the voltage matches their required input voltage (Groh et al., 2014).. 79 POLICIES AND REGULATIONS FOR PRIVATE SECTOR RENEWABLE ENERGY MINI-GRIDS Uganda, customers of one telecommunication operator Policy measures to facilitate access to are able to send money across operators. But, in finance. The solar DC mini-grid venture is most Tanzania, regulations permit only transactions between efficient under a continuous and ongoing rollout customers of the same operator. There, developers strategy. To finance expansion, operators need short- had to set up and maintain business relationships term capital (typically 3 to 5 years) without balance- with various telecommunication operators, increasing sheet finance or corporate guarantees. Equity overhead costs. acquisition is relatively manageable if the operator’s business model is scalable and has a track record. In order to scale faster, debt is important, as it costs • Tariff regulations should allow flexibility in less than equity capital. Local commercial banks in tariff design for different end-users to ensure most developing countries have yet to fully realise viability and allow scalability. the investment opportunity offered by solar DC mini- • DC appliances should be considered for tax grids, often requiring collateral if they agree to lend at reduction. all, and solar DC mini-grid components are usually not accepted as collateral. • The public should be informed of the benefits of solar mini-grids. Mini-grid operators could attract debt capital from abroad in hard currency, but hedging against the dollar • National regulations should permit exchange risk remains a key concern. Government interoperability of mobile money collection intervention can be important, particularly at the early platforms. stages of mini-grid enterprise development (before the operator’s track record has been established) Mitigating the risk posed by the arrival of the and for low-cost debt during scale-up. This could be main grid. Untimely arrival of the main grid could achieved through dedicated debt funds managed by render the solar DC mini-grid redundant. It is important public agencies responsible for rural electrification to note, however, that solar DC mini-grids are relatively or by local commercial banks (through on-lending). less exposed to this risk than are larger mini-grids. Public financing can also be used as guarantees to Major down-scaling of solar DC technology has meant leverage commercial debt on favourable terms. This that, in some cases, operators can move their systems could further be supportedsupported by measures to another site. Although this avoids stranded assets, that would give renewable energy priority in it does imply a cost in terms of developing the new commercial banks’ lending. market and re-installing the system. Greater clarity on grid-extension plans in the short-, medium-, and long- term, as well as demarcation of sites for stand-alone and mini-grid development, would reduce developers’ • Dedicated debt funds for mini-grid projects uncertainty. can bridge the financing gap during scale-up. • Clarity on grid-extension plans and • Derisking and on-lending instruments would demarcation of sites for mini-grid encourage commercial banks to be flexible development will reduce uncertainty for with respect to collateral, track record, developers. rates, and tenors. 80 POLICIES AND REGULATIONS TO SUPPORT PRIVATE SECTOR MINI-GRIDS 3.5.2 SOLAR AND SOLAR-HYBRID AC activities warrant an approval process to balance (TIERS 1–5), BIOMASS (TIERS 1–5), public protection with the benefits of biomass-based AND WIND AND WIND-HYBRID power generation. MINI-GRIDS (TIERS 2–5) Mini-grids can be rolled out in clusters of villages, Solar, biomass, and wind/hybrid mini-grids are meaning that a large number of systems can widespread solutions for rural electrification. be installed at several sites within a short time Together, they cover all tiers of electricity service and frame. The acquisition of land titles for all these offer unique advantages for mini-grid development. sites can represent a considerable cost and prove Modularity, cost, and ease of development favour extremely time consuming. Where assignment of solar-based solutions; biomass-based options cover land titles is administered on a regional or national more tiers of service at lower costs but are subject to level, the processes can be streamlined and fast- feedstock availability. Wind and wind-hybrid solutions tracked. Challenges emerge in countries where local are increasingly preferred for hybridisation, especially authorities are responsible for the administrative in larger mini-grids in rural and island contexts. process. Because they are typically not involved in Because the policy and regulatory conditions for rural electrification planning, local authorities may these mini-grids are largely similar, they are analysed lack an interest in accelerating the process, further together here. Depending on the current state of complicating attempts to streamline land acquisition. technology and market penetration, specific measures Demand and load management are essential may still be necessary. instruments in the economic operation of mini- Legal and licensing provisions. Segmented grids. Especially in systems with high solar or wind licensing allows regulators to calibrate the extent of penetration, they enable proper use of generated oversight needed, while keeping administrative effort and stored electricity, thereby lowering the LCOE on the part of the regulator and developer to a minimum and increasing system lifetime. Effective demand and (as explained in 3.1). Thresholds for exemptions vary but load management also allow productive users to be are usually around 100 kW. The class of mini-grids under supplied during times of high wind or solar availability discussion here (solar/solar-hybrid, wind/wind-hybrid, at tariffs competitive with those of the main grid. and biomass) spans both sides of that threshold, with Demand and load management functions are biomass and solar/wind-hybrid systems likely to reach typically performed with smart metering technology MW scale. Small-scale greenfield rural electrification specifically developed for use in mini-grid settings. projects based on, say, solar/solar-hybrid and biomass Because these technologies are constantly improving technology and falling below a specific threshold and changing, setting standards or requiring specific should be considered for exemption from licenses. certifications would stifle innovation. At the same A key differentiating factor is the ESIA requirement. time, governments and donor agencies must establish Solar and wind-based solutions, in both greenfield and minimum specifications for service levels and safety. brownfield contexts, are known to have similar impacts This trade-off should be carefully considered. While and, therefore, a certain level of standardisation is exemptions of mini-grid meters from the metering appropriate. Often, small simplifications are possible code is one approach, the adoption of international within the existing framework. In Tanzania, for example, certification and testing standards is another. Larger JUMEME was allowed to carry out ESIAs on a cluster renewable energy markets (such as those of the basis, rather than by individual project. But biomass- Philippines and Nigeria) may have country-specific based projects can have wider environmental and certification and testing procedures, while smaller social impacts associated both with the collection of markets would be well advised to accept international the feedstock and with the by-products of combustion certificates. In the medium-term, harmonisation of (ash, liquid wastewater). Regulators and environmental meter certification and testing would benefit the agencies will want to consider what scale and which sector considerably. 81 POLICIES AND REGULATIONS FOR PRIVATE SECTOR RENEWABLE ENERGY MINI-GRIDS More generally, adopting technology-specific Off-take, specifically in the form of productive loads, international quality standards and certifications can plays an important role in securing long-term cash support market development. For instance, international flows, especially in the case of highly capital-intensive standards, such as IEC 61400-2 (small wind turbines), IEC solar, wind, and biomass hybrid mini-grids. PPAs 61400-12-1 (performance), and IEC 61400-11 (acoustics), with industrial and commercial off-takers, including and certification programs such as the Small Wind telecommunication towers, are known to provide a Certification Council and Microgeneration Certification strong basis for developing private mini-grids that can Scheme can fast track the implementation of wind- sustainably cater to rural loads. Another key avenue for hybrid mini-grid systems (WWEA, 2014). growth, specifically for solar and wind-hybrid systems, are brownfield sites where renewables offer a major opportunity to reduce diesel consumption provided a reliable off-taker is in place to limit the risk generally • Small-scale greenfield rural electrification associated with the project-development stage of projects based on solar/wind and greenfield projects. biomass technology, under a specific Solar, wind, and biomass-based mini-grid solutions threshold, could be exempt from licensing are differently positioned in the mini-grid market. With requirements. recent decreases in costs and greater modularity, solar • Environmental impact assessments and PV is increasingly the preferred technology option where land acquisition processes can be simplified resources permit it. Wind-based solutions are gaining a and standardised by bundling projects. In niche in hybridisation and in the large-scale island mini- projects that have the same structure and grid market. Biomass, which is reliant on feedstocks, is impact and limited variations from site to growing both for rural electrification application and site, assessments can be replaced with for captive use (e.g., bagasse). Depending on their mandatory environmental guidelines. positioning, some additional policy incentives may be • Certification requirements for mini-grid needed to accelerate market development (Box 3.20). meters should allow innovation and ensure quality service for consumers. Box 3.20 Incentives for decentralised wind development Wind technology offers important opportunities Cost recovery and tariff regulation. To ensure for powering mini-grids in rural areas as well as cost recovery, a special emphasis on tariffs and off- in island networks where space is a constraint take is needed. Operators should not be bound by and larger systems with better economies of national uniform tariffs but be permitted to charge scale can be deployed. Targeted incentives tariffs in accordance with local willingness to pay and that facilitate resource assessments and foster cost recovery, as discussed in Section 3.2. In addition research, development, demonstration, and to direct financial support, there are different ways commercialisation would give the market a through which governments can buy down consumer better understanding of the opportunity at hand tariffs, including fiscal measures (e.g., exemptions and diversify the technology solutions available from import and value-added taxes, and tax breaks to power mini-grids. Policy instruments, such or caps). Senegal, for instance, has implemented a as feed-in-tariffs and standardised PPAs, could policy under which any mini-grid project within the also be supportive for brownfield investments ERIL programme can be exempted from import tax. targeting publicly owned diesel mini-grids that can be hybridised with wind or solar. 82 POLICIES AND REGULATIONS TO SUPPORT PRIVATE SECTOR MINI-GRIDS The quality of information on resource availability is a major cost and risk factor, especially in the case of • Tariff design should allow economic viability wind, which can be very site-specific and requires and sustainability of projects. very detailed resource assessments. By facilitating the • To complement direct financial support, financing of feasibility studies and wind assessments, fiscal measures can be deployed to reduce governments can reduce the time, cost, and risk of consumer tariffs. project development for wind-hybrid mini-grids. REAs or other public agencies could spearhead a campaign • Targeted incentives that facilitate resource to gather the necessary information and make wind assessments and foster research, development, resource data available in a central database. Nepal’s demonstration, and commercialisation would Alternative Energy Promotion Centre has supported diversify the technology solutions available to solar-wind hybrid development by installing 30-meter power mini-grids. wind-measurement stations and monitoring wind • Policy instruments, such as standardised data at various sites, among other measures. PPAs, could also be supportive for brownfield Publicly available and online tools, such as IRENA investments targeting publicly owned diesel Global Atlas, could also be important in undertaking mini-grids that can be hybridised with wind or preliminary resource assessments for mini-grid solar. development (Box 3.21). Another cost factor for developers is building human capital to ensure operability of systems over the long Mitigating the risk posed by the arrival of the term. In cooperation with national training institutes, main grid. On arrival of the main grid, mechanisms measures can be taken to develop a workforce must be in place to connect mini-grids to the main of skilled technicians who have the training and grid or to compensate mini-grid operators. Such knowledge needed to install, operate, and maintain mechanisms were discussed in detail in Section 3.3. mini-grid systems. The discussion here highlights specific issues related to solar, wind, and biomass mini-grids. Box 3.21 Online resource assessment tools for PPAs for mini-grids feeding into the main grid. Tariff prefeasibility analysis: IRENA’s Global Atlas setting for PPAs governing the sale of power from mini-grids to the main grid must reflect the differing IRENA’s Global Atlas for Renewable Energy economics. For example, the generation cost of new (http://irena.masdar.ac.ae/) features data solar power plants decreases over time as technology from a consortium of 67 countries and 50 costs reduce. This means that old mini-grids are likely data providers, making it world’s largest to offer electricity to DNOs at a price that is higher collection of the most recent and accurate than that of new mini-grids, making it less palatable for DNOs to interconnect mini-grids once the main grid public maps of renewable energy resources. arrives. RURA’s regulation for Rwanda, for example, The Global Atlas supports public and private states that ‘The Small Power Producer Licensee shall entities in performing map-based prefeasibility have the right, if eligible, to sell electricity under the analyses. Maps are particularly valuable Renewable Feed-in-tariff programme in force at the because they provide a common language time of conversion.’ To mitigate the risk of stranded for dialog with local communities, thereby investments, the DNOs would need to accept a higher enhancing citizens’ understanding of projects feed-in tariff for old mini-grids. Therefore, a license and their potential impact. They also help alone does not protect the operator from stranded companies and investors to complete high- investment in case of main-grid connection. level evaluations of projects. 83 POLICIES AND REGULATIONS FOR PRIVATE SECTOR RENEWABLE ENERGY MINI-GRIDS Compensation mechanisms and spilt of assets in PPPs. Policy measures to facilitate access to finance. Except in small-hydro mini-grids, the separation In order to achieve economies of scale, financing is of movable and fixed assets is fairly well defined, structured around clusters of mini-grids developed in which opens up additional options for main-grid parallel and rolled out under the same project within interconnection. Generally, the generation part of a short time frame. (Except in the case of small-hydro mini-grids includes many assets that can be moved, mini-grids, few technical adjustments are required by such as batteries, solar PV panels, smaller generators, specific sites.) Clustering poses challenges related to small wind turbines, gasification stations, distribution the acquisition of long-term project-based debt finance. boards, and so on. Such assets carry a comparatively As the assets are spread across a large geographic area low investment risk, as they can be easily redeployed. and so cannot be liquidated easily, financiers struggle In contrast, fixed infrastructure (distribution networks to accept the assets as collateral. While the movable and buildings) are subject to high risk because they generation assets of solar, solar hybrid, small wind, and cannot be moved and reused elsewhere. An approach biogasification systems may have some value to the often taken to overcome this risk is to have the PPP financiers, the ability to liquidate fixed assets, notably provide for a split of assets: The public sector invests distribution networks, is typically considered very in, and perhaps owns, high-risk fixed assets, whereas limited. Therefore, distribution networks have limited the private mini-grid operator finances the lower-risk value as collateral in the financing structure. movable assets. This way, in the event of main-grid The PPP approach with a split of assets, as explained above, connection, the fixed assets may be handed over to the is one way to overcome this problem. To repeat, the private main-grid distribution network operator free of charge investor invests in movable generation assets, while the or in return for compensation paid to the government. government (or community) covers the cost of the riskier In any main-grid interconnection scenario, the business distribution assets. The approach is being tested in Nigeria value that the mini-grid operator generated should and seems to be accepted by local commercial banks, be considered. For instance, mini-grid customers are which are handling subordinated debt funds (combined typically already willing and able to pay for electricity, are with partial default guarantees from international donors) accustomed to using electrical appliances, and present and collateral provided by the mini-grid operator. higher demand than newly electrified customers. In Solar and biomass mini-grids provide the mini-grid sector RURA’s regulation of Rwanda’s mini-grids, this business a good point of access to local banks, as the resources value is taken care of by adding ‘the present value of and technology are well understood and systems can be expected net profits over the remainder of the Isolated rolled out easily. Sector-specific knowledge gained by Grid License and based on a discount rate provided by the bank in one project can be recycled in the next. To the Authority’ to the value of current assets. In Nigeria a expand and reinforce that knowledge, training for local similar approach is being discussed. bankers provided by public institutions and development agencies can be very effective. In Tanzania, this approach has been tried with the TEDAP Credit Line but so far has • The feed-in tariffs that will apply in the event not led to interest rates and tenors acceptable to mini- of main-grid connection should clear at early grid operators. To reach that stage, additional measures, stage of project development. such as low-interest subordinated debt funds combined • To reduce investment risks, PPPs should with partial default guarantees may need to be applied. consider the approach of split of assets. For the same reason of replicability, solar as well as • The business value of a mini-grid, as well biomass mini-grids are of high interest to international as the current value of assets, should be venture capitalists, who typically have a medium-term reflected in compensation mechanisms. investment strategy with a clear exit target. As local equity investors are usually more oriented toward the short term, international equity investors are often the only 84 POLICIES AND REGULATIONS TO SUPPORT PRIVATE SECTOR MINI-GRIDS viable option for mini-grid companies. Governments 3.5.3 HYDRO (RUN-OF-RIVER) (TIERS 1–5) wishing to attract international equity investors, who Global experience has shown that micro- and mini- often bring along international development banks, hydro has developed in markets with and without should review and simplify their rules for repatriation direct policy support, although with major differences of capital rules and withholding of tax. in the scale and quality of services provided. Nepal and Most expertise and experience in solar, wind, and Myanmar present interesting cases, as discussed in biomass mini-grids lies with small companies that Chapter 2. The following policy and regulatory aspects have taken the time to experiment with different are known to affect small-hydro mini-grid development. business models. These small companies have Legal and licensing provisions. The legal limited resources available for project development, framework strongly influences when and how the especially when it comes to rolling out larger projects private sector will enter the project development cycle. that require intensive resource assessments (as in the The micro- and mini-hydro policy of the Indian state case of wind). Technical assistance grants can help to of Uttarakhand, announced in 2015, sets as one of its meet this challenge. Tanzania is one of the forerunners objectives the creation of a favourable environment for in this area with its TEDAP Matching Grants. community ownership and private sector participation A harmonised approach to mini-grid subsidisation will in micro/mini hydropower, pointing to a PPP structure ensure fair market conditions for all players (public, (Government of Uttarakhand, 2015). The Small Power private, NGOs, development agencies). To provide Producers programme in Tanzania, on the other hand, a clear signal to the private sector, the subsidisation envisages a greater role for the private sector in the approach should be set up in such a way as to be development, operation, and management of the plant. visibly sustainable over the long run (with a gradual There is no single answer to the question of which phaseout, if necessary). Only with a clear long-term development model works best—various approaches are perspective can the investors needed for large-scale successfully operating in many different contexts. A key rollouts be attracted. lesson that has been learned, however, is the importance of distinguishing between the participating actors and making explicit their respective responsibilities. To • Innovative PPP models should be explored, avoid situations in which power management becomes focusing on risk-sharing between the public economically and administratively unsustainable, instead of government sector. One promising it should be clear who the owner of the plant is, who model is to split ownership of assets, with the will monitor service quality, who will manage local private investor investing in movable generation power service, and who accepts obligations to pay the assets, while the government (or community) established tariff (Practical Action, 2005). Government covers the cost of the riskier distribution assets. must attend to all of these aspects in order to reduce the • Local banks should be given training and risk of stranding assets and to create an environment in guidance in developing financing instruments which private actors will readily assume the various roles for mini-grids. that they are well suited to play. • Where necessary, a combination of The unique environmental and social impacts of partial default guarantees and low-interest small-hydro mini-grids compared with solar or wind- subordinated debt may be offered by the central based mini-grids make them particularly susceptible bank or development banks. to complex ESIA procedures, especially for larger • Subsidies may be used to establish a level projects. These procedures should be streamlined, playing field for all actors in the market, while simplified, made transparent, and, wherever possible, providing a long-term development vision for the standardised. Very small micro-hydro plants may private sector. lie outside the scope of regulation regime. In fact, in 85 POLICIES AND REGULATIONS FOR PRIVATE SECTOR RENEWABLE ENERGY MINI-GRIDS Malaysia, Myanmar, and Indonesia, hundreds of micro- configurations of 100% feed-in tariffs and under mixed hydro plants (most in the range of tens of kW) have configurations. Leasing models are also emerging thrived, with private entities, such as community-based to improve management and operation of new and organisations and NGOs, developing locally customised existing micro-hydro projects (Box 3.22). For isolated solutions. The absence of a regulatory regime has kept mini-grids, a suitable model of public-community- development costs low, but an issue of standardisation private partnership could be devised, with the public has emerged. Different development entities are sector taking over some revenue risks from the private adopting different standards for project development, partner, thus increasing the likelihood of attracting and some standards of safety, quality of power supply, private capital. Additional measures to increase capacity and technical competency of developers are needed to factors, such as promotion of local productive uses and ensure sustainable operations and growth in the sector. identification of anchor loads, are also recommended. Fiscal incentives to lower developers’ capital costs • Governments should ensure the roles of and facilitate technology transfer may include import the actors actors participating in mini-grid licenses and tax exemptions for generation, control, and projects are clearly defined; their respective metering technology. Control and metering technology, responsibilities of ownership, operation, in particular, remain critical technologies that are yet to management, and monitoring must be be localised even in mature markets. Therefore, proactive explicit to reduce the risk of stranding assets policies focusing on critical technology transfer could and to create an environment in which private reduce costs, make the technology more accessible to actors will readily assume various roles. local players, and increase the sustainability of projects. • ESIA processes should be streamlined, simplified, transparent, and, wherever Twenty-two micro-hydro power plants possible, standardised. Box 3.22 leased to private developers in Rwanda • Even where very small projects are not subject to regulation, minimum standards of The Rwandan government has leased 22 safety, quality of supply, and competency micro-power projects to private developers of operators should be in place to ensure for 25 years. The micro-hydro plants will be sustainable operations. developed or upgraded and managed by private investors over the period, before reverting to Cost recovery and tariff regulation. The private government control. 15 of the projects are new, sector will not invest in mini-hydro projects unless it while seven are in need of upgrades to boost knows that it will be permitted to recover costs. Policy capacity and efficiency. The leasing approach is and regulation can provide the necessary assurance by meant to promote private-public partnerships providing certainty about cash flows, ensuring that tariff- in the energy sector to attract private investors. setting processes are standardised and predictable (while The plants, located in Northern and Western also being sensitive to the context in which plants are provinces, include Agatobwe, Nyamyotsi I and deployed)30, and by introducing fiscal incentives to address II, Kimbili Rukarara V, Rugezi, Mutobo, Base I the capital cost challenge and allow technology transfer. and II, and Ngororero. They are expected to For grid-connected mini-hydro plants, measures to add about 24.6 MW to the national grid. provide certainty on cash flows could involve PPAs Source: Tumwebaze, 2015; Ministry of Infrastructure, 2015a. for mini-hydro projects being developed under 30. Because substantial investment is required to connect micro-hydro plants to the national grid, applicable PPA tariffs must be designed on a cost-plus-return basis if projects are to be attractive to developers. 86 POLICIES AND REGULATIONS TO SUPPORT PRIVATE SECTOR MINI-GRIDS grid-forming device to a grid-following one may be • Targeted policy measures can address challenging, especially in areas where grid stability revenue risks for the private sector, including and the generation capacity of the small-hydro well-defined tariffs and PPAs for grid-connected station are low. To solve this problem, Nepal has small-hydro projects and innovative public- tried aggregation. In 2011, AEPC successfully piloted private-community models for isolated interconnection of six nearby micro-hydro plants to projects. form a local grid with a total capacity of 106 kW. The interconnected Baglung mini-grid, with its enhanced • Measures to increase capacity utilisation in generation capacity, is now being connected to the isolated small-hydro projects, such as promotion main grid. Another project, the Taplejung mini-grid, of local productive uses and identification of anchor loads, are recommended. interconnects eight micro-hydro plants (26–95 kW) and two mini-hydro plants. • Tariff-approval processes should take into consideration the settings settings in which Current financing structures for micro-hydro plants, plants may be deployed. which are primarily based on grants, make it difficult to access the additional financing required to upgrade • Fiscal incentives may be necessary to reduce the plant to make it compatible with the main grid. developers’ capital cost and consumer tariffs Therefore these costs must be factored into the and to facilitate critical technology transfer. original system design and costing or PPA tariffs must be set to justify the additional investment. Mitigating the risk posed by the arrival of the main grid. Isolated small-hydro projects—like solar, wind, biomass-based mini-grids—remain at risk of encroachment by the national grid. Transparency in grid- extension planning and greater institutional coordination can address this risk. In Nepal, the government provides financial support for expansion of the national grid extension and for micro-hydro plant development, but through different independent entities (NEA and AEPC). The same is true of India and Nigeria, where institutions at the federal and state level pursue electrification in parallel. Under such circumstances, electrification programmes need to be harmonised and coordinated so that financing is optimally deployed and the risk of stranded assets reduced. When the grid arrives, policy and regulatory measures need to be in place to either compensate the operator (different approaches are discussed in Section 3.3) or connect the plants to the grid (Box 3.23). For the latter to occur, some technical and economic challenges need to be overcome. On the technical front, synchronisation of frequency and voltage is not always straightforward. Also, transitioning a small-hydro power station from a 87 POLICIES AND REGULATIONS FOR PRIVATE SECTOR RENEWABLE ENERGY MINI-GRIDS Box 3.23 The benefits of integrating an isolated Policy measures to facilitate access to small-hydro project upon arrival of the main grid finance. Project development costs for hydro-power sites can be quite high compared with those of solar and Many isolated micro- and mini-hydro plants biomass systems. In addition to the costs associated operate at low capacity factors (e.g., around 20% with electrical, mechanical, and civil engineering, in Nepal). When such plants are connected to there are those of transporting equipment to remote the main grid, this capacity factor increases to areas (often involving week-long treks or delivery by close to 100%. In cases where the levellised cost helicopter). Often overlooked are the prefinancing of energy of the micro/mini-hydro project (after costs of technical and community-engagement visits, taking transmission and distribution losses into system design, preparation of loan requests, and account) is below the lowest consumer tariff on drawing up legal documents. Technical assistance and the main grid, main-grid interconnection can project development grants can ease the prefinancing burden on private project developers. boost profitability for both the mini-grid operator and the operator of the main grid’s distribution Concessional loans with tenors of at least 10 years network. Standardised PPAs for power sales, can provide projects with sufficient funds to service which make the mini-grid operator a small power debt and pay for operations and maintenance. Grants producer, and bulk power purchases (in case the for capital expenses are effective in bringing down mini-grid operator also becomes a small power the investment needed to build the plant, as well as distributer for the main grid) can create enabling its generation cost. But grants have to be designed conditions for mini-grid operators, as they do in such a way as to allow for sustainable operations under the SPP2 rules in Tanzania. Interconnection and eventual scaling up. Setting grants based on would improve the economic viability of these predefined household loads constrains the ability of the system to cope with increases in community projects, while reducing transmission and demand (World Bank, 2015). distribution losses for the utilities. Projects are underway in several countries. In Nepal, for In general, a sustainable and market-driven approach instance, the Syaurebhumi micro-hydro (23kW) is needed to increase the effectiveness of public and Leguwa Khola micro-hydro (40kW) have financing. One approach could be to establish their PPAs finalised at NPR 4.80 per kWh for revolving funds pooling international development the wet season and NPR 8.6 per kWh for the dry finance with local public finance to fund projects season (Kathmandu Post, January 6, 2016). directly or to provide risk guarantees that enable local financing institutions, in particular commercial banks, to lend. Box 3.24 presents an overview of one such arrangement in Nepal. Innovative approaches such • Transparency in planning extensions of as partial default guarantees or subordinated debt the national grid and greater institutional financing from donors or development banks may coordination on electrification programmes also be solutions to the financing challenge. can minimise the risk associated with untimely arrival of the main grid. • Policy and regulatory measures need to be in place to either compensate mini-grid operators upon arrival of the main grid or to connect the operator’s plant to the grid. • Current financing structures for micro- hydro plants make it difficult to access the additional financing needed to make the plants compatible with the main grid. These costs need to be factored into the original system design and costing, or PPA tariffs must be set to justify the additional investment. 88 POLICIES AND REGULATIONS TO SUPPORT PRIVATE SECTOR MINI-GRIDS Box 3.24 A debt fund for micro-hydro projects: EnDev Nepal Government financial support for micro-hydro development in Nepal covers up to half of the total investment, leaving the remaining financing gap to be filled by the local community or private developer. Commercial banks could fill this gap, but their limited experience with renewable energy projects and with lending in rural areas raises their perceived risk—and their interest rates and collateral requirements. To address this, the Micro Hydropower Debt Fund has been set up under the supervision of Nepal’s Alternate Energy Promotion Centre (AEPC) and placed at two commercial banks for administration. Besides providing financial support to local communities, the banks are expected to gain experience in financing micro-hydro project development. Multilateral financial institutions involved as partners administer the loan in the field on behalf of the selected partner bank. Once the loans have been repaid by the communities the funds will be used to finance additional micro-hydro schemes. The developers of 27 micro-hydro plants have so far benefited from financial support through the debt fund. Twelve of these plants were in operation by the end of 2015, following the severe earthquake of April 2015, and four others were set to reopen. Figure 3.7 Illustration of financing scheme in Nepal GIZ EnDev AEPC Debt fund (Financing) (Supervision) (Implemented by commercial banks) 50% 20% 30% Subsidy from NRREP & Own Village Loan to communities/ NRREP: National Rural and Renewable Energy Programme RERL via AEPC contribution project developers RERL: Renewable Energy for Rural Livelihood Source: GIZ, n.d. Larger mini-hydro systems are better placed than smaller ones to secure long-term project financing, • Technical assistance and project especially in cases where they are (or could be) development grants can be useful during grid-connected and benefit from PPAs at suitable the prefinancing phase for private project tariffs. Generally, larger systems with suitable PPAs developers. can guarantee a sufficient return on investment to • Access to low-cost, long tenor loans attract private financing, as has been the case with increase the effectiveness of public other technologies. financing. The longevity of the power plants (well in excess • Access to debt financing can be expanded of 25 years) requires special consideration from through dedicated debt funds, financial governments as well as IPPs with a possibility of risk guarantee instruments, enhanced refinancing or leasing (as seen earlier) or even PPP capacity and experience within local models (e.g., build-operate-transfer). The financing commercial banks, and derisking measures needs of local equipment manufacturers also such as long-term PPAs for grid-connected deserve attention, since, in many markets, turbines installations. are locally manufactured and represent a substantial • Financing for local manufacturers play an part of projects’ capital expenditure. important role in the value chain and should be facilitated. 89 POLICIES AND REGULATIONS FOR PRIVATE SECTOR RENEWABLE ENERGY MINI-GRIDS 3.6 CONCLUSION This chapter discussed policy and regulatory requirements of various combinations of mini-grid technology and tiers of service. Table 3.4 summarises the analysis, categorising the different policy recommendations into primary, secondary, and tertiary measures. The next chapter will explore this categorisation in greater detail and discuss how countries translate the identified recommendations into laws, regulations, and other legal frameworks. Table 3.4 Policy requirements for different combinations of mini-grid technology and tier of electricity service Solar DC (tiers 1–3) Hydro (run-of-river) (tiers 1–5) Generating, distributing and selling of electricity is legal • Exemption from licensing • Simplified and standardised licensing processes • Exclusion from grid code • Innovative metering allowed without certification Primary • Land rights simplified for small projects of e.g. <1MW • Simplified procedures for ESIAs Legal and licensing provisions and licensing Legal Secondary Water rights laws simplified for small projects of e.g. <1MW • • procedure Primary • Import license and tax exemption for generation, control, and metering technology • Electricity sales revenue in mini-grids (<100 kW) exempted from VAT; other mini-grids benefit from reduced VAT + tax break or cap • Cost recovery and recovery Cost Secondary and VAT Reliable information on national grid planning is publicly available • Provisions for village exclusivity established in • Interconnection rules, FiTs, standardised PPAs policy and law established Primary n/a the arrival of the main grid the arrival Secondary Mitigating the risk posed by by posed risk the Mitigating • Long-term grant program • Revolving debt/equity fund or debt guarantee fund • Revolving debt fund with tenors of >15 years Primary partial default guarantee or convertible grant funding • Low-collateral loans facilitated by national banks • Foreign investments enabled by simple prioritising lending to solar DC mini-grids repatriation rules and low withholding tax. access to finance to access Manage foreign exchange rate risk or facilitate local currency loans Secondary Policy measures to facilitate facilitate to measures Policy • A level playing field in terms of public support for • Hydro resource data is publicly available • GIS data on settlement location, number of • Interoperability of mobile money platforms inhabitants, and settlement density is available • Information on benefits of solar is disseminated • Corruption is prevented through transparent administrative processes Tertiary measures Tertiary 90 POLICIES AND REGULATIONS TO SUPPORT PRIVATE SECTOR MINI-GRIDS Solar and solar-hybrid AC (tiers 1–5) Wind and wind-hybrid (tiers 1–5) Biomass (tiers 1–5) Generating, distributing and selling of electricity is legal • Mini grids (<100 kW) exempted from licensing • Mini grids (>100 kW) follow simplified and standardised licensing processes • Innovative metering allowed without certification • International standards and certificates recognised • Land rights simplified for small projects of e.g. <1MW • Simplified procedures for ESIAs Water rights laws simplified for small projects of e.g. <1MW • Mini-grids (<100 kW) exempted from tari regulation • Mini-grids (>100 kW) have streamlined and standardized tari approval procedure • Import license and tax exemption for generation, control, and metering technology • Electricity sales revenue in mini-grids (<100 kW) exempted from VAT; other mini-grids benefit from reduced VAT + tax break or cap Reliable information on national grid planning is publicly available • Interconnection rules, FiTs, standardised PPAs established for greenfield and brownfield projects • Main-grid connection risk mitigated through compensation mechanism or predefined PPA tari together with obligation of distribution company to contract • Communities allowed to sign exclusivity contracts with mini-grid operators; contracts binding on distribution network operators • Technical assistance and project development grants available • CAPEX grants covering distribution/public assets preferably delivered as performance grants or through long term PPP facilities • A revolving debt fund with tenures of • A revolving debt fund with tenures of • A revolving debt fund with tenures of >8 years; partial default guarantee or >8 years; partial default guarantee or >5 years; partial default guarantee or convertible grant funding convertible grant funding convertible grant funding • Foreign investments enabled by simple repatriation rules and low withholding tax. Manage foreign exchange rate risk or facilitate local currency loans • GIS data on settlement location, number • Feasibility studies and wind assessments • Biomass resource data is publicly available of inhabitants, and settlement density is are facilitated or financed GIS data on settlement location, number of available Wind resource data is publicly available inhabitants, settlement density is available • Corruption is prevented through • GIS data on settlement location, number of • Corruption is prevented through transparent administrative processes inhabitants, settlement density is available transparent administrative processes • Interoperability of mobile money • Corruption is prevented through • Interoperability of mobile money platforms platforms is regulated transparent administrative processes is regulated • Match making platforms and events for • Interoperability of mobile money platforms • Matching making platforms and events for small industrial o-grid power consumers is regulated small industrial o-grid power consumers and mini-grid operators • Matching making platforms and events for and mini-grid operators small industrial o-grid power consumers • Skilled labour and academics trained for and mini-grid operators operation 91 POLICIES AND REGULATIONS FOR PRIVATE SECTOR RENEWABLE ENERGY MINI-GRIDS TRANSLATING RECOMMENDATIONS INTO POLICIES AND REGULATIONS 92 TRANSLATING RECOMMENDATIONS INTO POLICIES AND REGULATIONS Developing the policy and regulatory framework policies and regulations related to the electricity needed to scale up mini-grid deployment would sector, rural electrification plans, and direct financial require introducing new, or adapting existing, policies, support provided for mini-grid projects. regulations and other legal structures that govern • Secondary measures are not specific to the the functioning of the electricity sector. Additional energy sector but greatly affect the viability of measures that transcend ministerial mandates, such as mini-grid development. These are typically put policies and regulations governing the financial sector, in place by non-energy ministries and associated data and statistics, and rural development, would also public agencies. They include policies related to be needed. This chapter focuses on the measures taxation, land rights, environmental protection, needed to create an enabling environment for mini- and banking. grid development. It begins by classifying measures • Tertiary measures contribute to the broader as primary, secondary, or tertiary (Section 4.1). Then, enabling environment for mini-grids. These en- it provides examples of national implementation of able the efficient implementation of primary and each type of measure to promote private mini-grid secondary measures, while supporting the sector deployment (Section 4.2 to Section 4.4). indirectly (although their effects cannot be easily measured and attributed directly). Examples of 4.1 CLASSIFYING POLICY AND such measures include statistics, data collection REGULATORY MEASURES and fossil fuel pricing. Developing the policy and regulatory environment Table 4.1 summarises the various primary, secondary, outlined in Chapter 3 involves measures that can be and tertiary measures and their relevance to the mini- broadly classified as primary, secondary, or tertiary. grid sector. Because legal frameworks and processes • Primary measures are intrinsically related to the vary from country to country, the aspects included national energy framework and remain under the in the table are only indicative. The remainder of this purview of public institutions mandated with energy chapter will discuss how primary, secondary, and matters, such as ministries of energy. These include tertiary measures are being implemented. 93 POLICIES AND REGULATIONS FOR PRIVATE SECTOR RENEWABLE ENERGY MINI-GRIDS Table 4.1 Primary, secondary and tertiary measures to promote mini-grid deployment Measures Relevance to the mini-grid sector National policy on Sets country objectives, identifies priority areas, and outlines the vision for electricity sector development and the role of renewable energy, including off-grid solutions. Dedicated mini-grid policies bring further definition energy, renewable and refinement, including capacity definitions, descriptions of different actors and their roles, and specification of energy, and mini-grids implementation-level interventions, service requirements, and financial incentives. Defines the timeline, mode, and implementation strategy for rural electrification, covering aspects such as: • The definition of electricity access Rural electrification • Districts/villages identified as being unconnected and areas where specific solutionse.g. ( , mini-grids) are strategy; master plan particularly suited • Financing and grant support strategies. Provides the legal basis for licenses, permits, and concession contracts and schemes for private generation, distribution, and sale of electricity. Establishes the legal and institutional framework for the design, implementation, Energy legislation and enforcement of regulations. Establishes dedicated institutions and defines roles and responsibilities within the sector. Implements the strategies and sets the rules of the game for all mini-grid stakeholders: • Defines tariff guidelines for mini-grid operators. Primary • Provides grid interconnection regulations and procedures. Mini-grid regulations • Ensures safe and reliable operation. • Establishes quality-of-service regulations. • Defines regulations governing feed-in tariffs and power purchase agreements. • Sets conditions for safety, power quality and service level. Outlines the dedicated financial support available for mini-grid projects: • Defines the types of financial support and their combinationse.g. ( , grants, concessional loans, guarantees, etc.). • Outlines the purpose of financing e.g.( , for project development, fixed assets, capacity building, operational Financial support for subsidies, leveraging working capital, etc.). mini-grids • Puts forth the conditions and processes for securing financing e.g.( , track record, cofinancing requirements, repayment options, equipment or service standards, etc.). • Provides the source of financing e.g.( , revolving debt funds, rural electrification funds, electricity levy or duty, etc.). Environmental and Defines environmental and health-related obligations of mini-grid developers and operators e.g.( , environmental health protection impact assessments, evaluation of use of hydro and biomass resources, etc.). Relates to taxation of rural electricity supply and imported equipment: • Defines taxation e.g.( , value-added tax) on mini-grid tariffs. If VAT applies, the amount paid per kWh by a mini- grid customer could be capped at the absolute amount of VAT paid by main-grid customer. • Establishes tax treaties between countries to avoid double taxation for foreign private sector developers and Taxation and other operators. fiscal measures • Outlines tax breaks, tax holidays, and incentives based on tax credits. • Defines exemptions from VAT for locally procured equipment, exemptions from service tax, etc. • Determines reductions in import taxes and duties for imported equipment. • Defines incentive for accelerated depreciation of generation assets. Provides the basis for land acquisition or operators’ use of land for generation and distribution (e.g., land ownership Land rights and use and leasing rules for local and foreign companies). Secondary Incorporation, Determines rules and procedures for establishing a company, including resources needed to establish special company formation purpose vehicles and the right to transfer profits overseas. Building and Defines processes during construction and installation, including permits and approvals for movable structures construction (e.g., containers), small buildings (e.g., power houses), etc. Affects the willingness and ability of: • Domestic financing institutions to lend to mini-grid projects e.g.( , priority sector lending provisions). • International financing institutions to finance local projects/enterprises. Banking • Insurance providers to cater to mini-grid project requirements. • Shapes the extent to which nontraditional financing can be used e.g.( , mobile payment, international crowdfunding, etc.) Technical assistance Establishes the knowledge base on mini-grid systems and business models and increases capacity for the and capacity building implementation and administration of projects at the individual, organisational, and enabling-environment levels. Gathers and makes available data to facilitate site selection, specifically on inhabitants per town/village, average Statistics and data income and existing semi-industrial loads, GPS locations and renewable resources. Identifies institutions collection responsible for storing and processing data useful for planning. Tertiary Expands the scope of electricity access discussions to other sectors—including health, education, micro- Synergies with other industries, telecommunications, agriculture, and water—to identify synergies (e.g., as anchor loads) and maximise sectors development impact. 94 TRANSLATING RECOMMENDATIONS INTO POLICIES AND REGULATIONS 4.2 IMPLEMENTATION OF POLICY exit options when the main grid arrives (UPNEDA, RECOMMENDATIONS THROUGH 2016). The Uttar Pradesh Electricity Regulatory PRIMARY MEASURES Commission followed that policy with its Mini- Grid Renewable Energy Generation and Supply In this section, primary policy measures are briefly Regulations, 2016 (UPERC, 2016). illustrated. Key recommendations for specific mini-grid technologies are given where applicable. • In 2015, the Indian state of Uttrakhand unveiled a policy entitled Development of Micro and Mini Hydro National policy on energy, renewable energy, Power Projects up to 2 MW (2015) to create conditions and mini-grids. Integrating mini-grids into national conducive to private sector and community energy policy is essential for creating a conducive participation (Government of Uttrakhand, 2015). environment for private mini-grid development. In a growing number of countries, national energy policy Energy policies in several countries provide addresses mini-grids and other off-grid solutions for dedicated targets for rural electrification or off-grid electrification, with explicit mention of private sector generation (e.g., in Rwanda and Kenya). To reach the participation: targets, the policies set guiding principles, including the development and implementation of a rural • ‘Policies and a supportive regulatory framework electrification strategy, or master plan. shall also be enacted to expand investment and private sector engagement in off-grid electricity Rural electrification strategy; master plan. service provision, including through partnerships Rural electrification strategies (or master plans) are and innovative business models.’ —Rwanda’s energy increasingly popular ways to provide clarity to sector policy (2015) stakeholders—public agencies, private firms, and development organisations—on how the government • ‘Promote private sector participation in the intends to progress towards universal electricity access. development and supply of modern energy services’ There is no common structure for such plans and no —Tanzania’s National Energy Policy (2015) common methodology for developing one; the level and Dedicated policies for mini-grid development scope of the information presented varies substantially. are also being announced. These provide greater In some cases the plans for grid-based and off-grid clarity and detail on different aspects, including solutions are kept separate. In Namibia, the Off-Grid definitions, performance and technical standards, site Energisation Plan (OGEMP) is complementary to the identification and development, options on main-grid Regional Electricity Distribution Master Plan (REDMP). arrival, financial assistance and other incentives, and The underlying objective of the first is to provide institutional roles and processes. Such policies may access to appropriate energy technologies to everyone be general (that is, technology-neutral) or apply to living or working in off-grid, pre-grid, and ‘grey’ areas31 specific technologies, as in the case of India. (UNDP, 2007). As one of its outcomes, Kenya’s National • India announced its draft National Policy on Energy and Petroleum Policy (2015), provides the basis Renewable Energy-Based Mini/Micro Grids in June for the development of a comprehensive electrification 2016 (MNRE, 2016). The draft policy is expected to strategy for universal access to electricity by 2020. serve as a guide for dedicated policies at the state The strategy is expected to call for an electrification level. The state of Uttar Pradesh launched its own fund, set technical standards, determine the number mini-grid policy (Uttar Pradesh Mini-Grid Policy, and location of households and the extent of electricity 2016), which defines the development process, supply, prioritise areas to be electrified, propose off- business model, financial support available and grid systems where appropriate, and define the role 31. Off-grid areas are those that, according to the REDMP, will not have access to electricity within 20 years. Pre-grid areas, as defined in the REDMP, are those that will not have access to electricity within 5 years. However, the OGEMP focuses on providing access to pre-grid areas that will not have access to electricity within 10 years in the updated REDMP GIS database. Grey areas are those where it is not clear in the REDMP how or if access to electricity will be provided 95 POLICIES AND REGULATIONS FOR PRIVATE SECTOR RENEWABLE ENERGY MINI-GRIDS of county governments in the national electrification and village and their average income, and existing strategy (Ministry of Energy and Petroleum, 2015). and potential semi-industrial operations. Sources In general, rural electrification master plans should include the national census, GPS data on villages, and include clear budget references and output indicators. renewable resource data. It should explicitly identify grid-extension areas and Energy legislation. Energy laws or acts codify off-grid areas suitable for mini-grids. A single public and consolidate policy decisions on electrification organisation should be responsible for collecting all and renewable energy. They form the legal basis and relevant information and preparing updated maps institutional framework for legal private electricity on an annual basis. The information to be collected generation, distribution, and sales. The codification and presented includes: current and planned grid of energy policy might include formulations similar to extensions, reliable numbers of inhabitants per town those sampled in Table 4.2. Table 4.2 Examples of policy decisions appearing in legislation Jurisdiction Policy decision Legislative formulation or description and date ‘Very Small Isolated Grids that, at the time of commissioning or subsequently Exemptions from following expansion, have total net generation capacity of less than 50 kW licensing and tariff (< 50 kW) shall be exempted from licenses issued under this Regulation. The Rwanda (2015) approval Developer of a Very Small (<50kW) Isolated Grid shall however notify the Authority on such activity prior to its commencement.’ ‘The developers intending to carry out the following activities shall apply for a Simplified Electricity License: a. Medium-size Isolated Grids that, at the time of commissioning or subsequently following expansion, have total Simplified processes for net generation capacity that is connected to the Isolated Grid of between obtaining licenses for Rwanda (2015) 100 kW and 1 MW( 100 kW- 1MW); b. Small Isolated Grids that, at the time mini-grids of commissioning or subsequently following expansion, have total net generation capacity that is connected to the Isolated Grid of between 50 kW and 100 kW (50-100kW).' Standardised templates for registration and licensing/concession request Standarised licensing or will be available at the homepage of the regulator. These templates have concession processes Tanzania (2016) reduced information and non-sector permits requirements, and inform about for mini-grids regulatory decision making processes transparently ‘Single Window Clearance: UPNEDA will act as the Nodal Agency for Single window clearance for all Mini Grid Projects which include the task related to India, Uttar Pradesh Principle of subsidiarity issuance and facilitation of desired Government orders, necessary sanctions/ (2016) permissions, clearances, approvals, consent, etc. in a time bound manner.’ ‘Any SPP or SPD that sells electricity to retail Customers, shall charge a tariff that, at a maximum, shall be limited to the sum of operating costs, depreciation on capital, whether supplied by the SPP or SPD or others, debt Cost-covering tariffs Tanzania (2015) payments, reserves to deal with emergency repairs and replacements, taxes, plus a reasonable return on capital provided by the SPP or SPD that reflects the risks faced by the SPP or SPD.’ ‘An operator of a VSPP [<100kW] who intends to sell power to a retail Tanzania (2015) Customer shall not be obliged to apply to the Authority for approval of its Retail Tariffs, but the Authority may review the VSPP’s Retail Tariff Exemption from upon receipt of a petition on the Retail Tariff charged signed by 15% of the regulatory approval for households in the area served by the VSPP.’ micro-grid tariffs ‘The Authority shall not accept comparisons between tariffs charged by the Rwanda (2015) Licensees under this Regulation and tariffs charged by Large Distribution Network Licensees as a valid reason for customer complaints.’ 96 TRANSLATING RECOMMENDATIONS INTO POLICIES AND REGULATIONS Table 4.2 (continued) Examples of policy decisions appearing in legislation Jurisdiction Policy decision Legislative formulation or description and date Electricity Tariff: Developer will charge Rs. 60/- per month for load of 50 Watt, Rs. 120/- per month for load up to 100 Watt for 8 hours of daily India, Uttar Pradesh Tariff caps electricity supply and for the load more than 100 Watt tariff will be on mutual (2016) consent between consumers and developer Mali (no date; unofficial A concession is required to generate, transmit and sell electricity. The Concession with translations of concession is granted for at least 15 years. The main-grid operator shall not exclusivity concession documents connect the mini-grid to the main-grid within these 15 years. by World Bank) ‘24. (3) In the event a SPP Developer who has been operating an SPP that has been previously operated on a Mini-Grid requests the Authority to operate as an SPP selling bulk electricity to a DNO connected to the Main-Grid under Rule 24 (1) (a): (…) (c) the applicable tariff paid to the SPP shall be the Mini-Grid tariff until: Feed-in tariffs and (i) the interconnection with the Main-Grid; or standardised power (ii) the date specified in the notice described under Rule 24 (1), whichever Tanzania (2015) purchase agreements comes later; and for renewables (d) thereafter, the applicable tariff shall be: (i) for SPPAs executed before coming into force of the Rules, the Main- Grid Standardised SPP Tariff calculated on the basis of avoided cost principles shall apply; (ii) for SPPAs executed after coming into force of these Rules, the Main- Grid Standardised SPP Tariff calculated on the basis of technology cost principles shall apply’ ‘The price for the purchase of assets and rights of the Isolated Grid (…) shall be negotiated based on the following: a. The net book value of fixed assets indexed with the consumer price index Compensation and based on generally accepted accounting principles, plus Rwanda (2015) mechanism b. The value of current assets less current liabilities; plus c. The present value of expected net profits over the remainder of the Isolated Grid License and based on a discount rate provided by the Authority. ‘ ‘24. (1) An SPP Developer who has built a distribution system to standards that allow interconnection with the Main-Grid shall, in the event of an SPP that has been operating on an isolated Mini-Grid and eventually becomes connected to the Main-Grid, apply to the Authority for the right to operate as: Interconnected (a) an SPP selling to a DNO that is connected to and operating on the Tanzania (2015) mini-grids Main-Grid; (b) an SPD that purchases electricity in bulk from a DNO connected to the Main-Grid and then resells that electricity to the SPD’s retail Customers; or (c) a combination of a Small Power Producer and an SPD.’ A concessional debt support fund for renewable energy mini-grids shall be Debt support Nepal (2016) established and administered by two competitively selected local banks. Sources: RURA, 2015; EWURA, 2016; Government of Uttar Pradesh, 2016; Tanzania, 2015; EnDev, 2016. Mini-grid regulations. Regulators may consider On the question of tariff regulation, it should ensure exempting smaller mini-grid systems from regulation financial sustainability and viability for private or reducing technical standards, environmental developers or operators. It is important to establish clear regulation, and quality-of-service requirements, while methodologies for computing tariffs or caps, and to retaining necessary safety standards. Recognition of consult with relevant stakeholders during the decision- international standards and certification programs making process. It is also advisable to coordinate tariff (ARE, 2011b) can facilitate the implementation of methodology decisions with regulatory decisions renewable energy mini-grids in general. outside the sector (e.g., on land titles, tax registration, 97 POLICIES AND REGULATIONS FOR PRIVATE SECTOR RENEWABLE ENERGY MINI-GRIDS environmental approvals, etc.), and to bundle 4.3 IMPLEMENTATION OF POLICY regulatory approval for a given company’s mini-grid RECOMMENDATIONS THROUGH sites in order to streamline administrative processes. SECONDARY MEASURES Where tariff regulation is exempted (e.g., for mini-grids Governments usually require mini-grid operators under a specific capacity), community-approved tariffs to obtain approvals and permits from within the are arrived typically through a participatory approach. energy sector and from outside it before starting In either case, appropriate financial support may be their operations. Examples from outside the energy needed to ensure sustainable operation and viability. sector include environmental, health, and safety Financial support. The provision of financial support approvals; tax registration; import licenses; land and from government sources is often outlined in a policy natural resource rights; and permission from local document. An example is Nepal’s Renewable Energy authorities to conduct business and to construct Subsidy Policy (2016), which discloses the subsidy power generators and distribution lines. This section amount for various renewable energy technologies briefly discusses secondary measures, with specifics and the regions where they are being deployed. A on mini-grid technologies when applicable. key determinant of the application of subsidies in the Environmental and health protection. Instead country is that the subsidy generally covers 40% of the of running through a dedicated environmental total costs. The remainder is presumed to come in the impact assessment (EIA), mini-grid projects could be form of credit (30%) and private sector investment. Often, communities or households may make cash or categorised. Each project category has its specific set in-kind contributions (AEPC, 2016). In India, central of environmental risks—of pollution, noise, and so on financial assistance for off-grid and decentralised (Box 4.1). Experience suggests that solar mini-grid EIAs, solar applications, including mini-grids, is set for each for instance, are largely the same. Mini-grid operators financial year in an official notice (MNRE, 2014). A great should therefore be bound by rules established for number of financing programmes involve partnerships each category of project. That way, costly on-site visits between governments and donors or development and regulatory requirements can be reduced to the agencies. In these cases, donors provide a dedicated minimum. Hydro and biomass projects, which cannot funding line, often implemented through a public be assessed with the method above, should run through agency of the recipient government. Such partnerships a well-structured and light-handed EIA procedure. A are dynamic, and policy documents may explicitly useful exercise would be to raise awareness amongst declare the intention of the government to engage with environmental regulators about the characteristics of the wider donor/development community to establish renewable energy–based mini-grid projects to ensure funding facilities. that they are appropriately categorised. 98 TRANSLATING RECOMMENDATIONS INTO POLICIES AND REGULATIONS Box 4.1 Environmental, health and safety regulations for small power producers in Thailand The Thai Ministry of Natural Resources and projects that were under development with signed Environment (MNRE) sets the environmental review power purchase agreements, 96 were 9.9 MW and requirements for industrial facilities including small another 36 were between 9.0 MW and 9.8 MW. power producers (10–90 MW) and very small power A so-called Code of Practice report is required for producers (VSPPs, <10 MW). From the origin of the projects over 1 MW under the ‘Notification of Energy VSPP program in 2002 until 2012, no environmental Regulatory Commission (Code of Practice)’ dated review was required for projects under 10 MW, but September 2014. The regulation requires that for a an environmental impact assessment (EIA) was project to be approved by the Electricity Regulatory required for projects above that capacity. Commission, the owner must submit with the gen- The arrangement was not ideal; a significant eration-license application an environmental checklist number of VSPPs were approved or built that were addressing issues throughout the project lifecycle. just below the 10 MW limit, skirting the MNRE rule In addition, for projects above 5 MW but below 10 and engendering a public backlash against local MW, an environmental and safety assessment is also air pollution and the traffic and safety impact of required. The requirements of the assessment include trucks hauling biomass on local roads. By December establishing environmental baseline conditions and 2012, of 42 VSPP projects that were online, 20 were identifying and mitigating adverse impacts to the between 9 and 9.9 MW. Moreover, out of 174 VSPP environment and natural resources. Source: SLP Environmental, 2015. Taxation and other fiscal measures. This main-grid customer, especially in mini-grids with cost- category includes the taxation of rural electricity sales recovering tariffs. Thus, VAT tax exemptions, or caps as well as taxes on imported equipment and appliances for VATs on mini-grid tariffs, may be applied. To attract required for mini-grid installation or for subsequent foreign companies as mini-grid investors and operators, electricity use (e.g., DC appliances). With a proportional tax-withholding regulations may be reviewed and value-added tax, the amount of tax paid per kWh would bilateral tax treaties established to avoid double taxation be much higher for a mini-grid customer than for a of salaries, repatriated profits, and so on (Box 4.2). Box 4.2 Creation of a favourable investment climate in Tanzania Tanzania has supported the creation of an • Investors are guaranteed the unconditional environment conducive for foreign investments transferability of funds through authorised through several measures: dealers. • The One Stop Investment Centre brings all • Investments in Tanzania are guaranteed against relevant governmental agencies together in one nationalisation and expropriation. location to streamline the delivery of services to • Tanzania has become a member of the investors. Multilateral Investment Guarantee Agency • Investors are guaranteed free import and and the International Centre for Settlement of convertibility of foreign exchange. Investment Disputes. Source: Power Africa, 2015. 99 POLICIES AND REGULATIONS FOR PRIVATE SECTOR RENEWABLE ENERGY MINI-GRIDS Income tax reductions; tax holidays, exemptions, and for renewable energy in various countries can be reductions; and accelerated depreciation incentivise gained from a database maintained by the International mini-grid investment and increase the economic Energy Agency and IRENA: Global Renewable Energy feasibility of mini-grids at lower end-user tariffs. Taxes Joint Policies and Measures Database (www.iea.org/ and Incentives for Renewable Energy—2015, produced by policiesandmeasures/renewableenergy/). Table 4.3 KPMG Global Taxes (KPMG, 2015), provides information provides examples of taxation and fiscal measures on renewable energy taxation in 31 countries around employed to support renewable energy and mini-grid the world. More information on specific tax incentives development. Table 4.3 Examples of taxation laws and regulations that support mini-grid development Measure Country Law/act formulation / description Reference Sri Lanka Board of A 5-year income tax holiday applies to ‘power Income tax holiday Sri Lanka Investment (BOI) generation using renewable resources’. (2013) Sri Lanka Board of Upon expiration of the tax holiday, income tax is Sri Lanka Investment (BOI) limited to 12%. (2013) Reduced corporate income tax In the Tax Code of 2015 investments in renewable energy can benefit from a reduction in corporate Repoblikan’i Madagascar income tax equivalent to 50% of the investment Madagasikara (2015) undertaken. Equipment for the production of renewable energy is exempted from value-added tax. The list of Repoblikan’i Reduced VAT Madagascar products exempt from VAT includes wind power Madagasikara (2015) generators, hydropower generators, solar water heaters, and solar PV panels. Companies producing electrical energy from wind, Import tax reduction Brazil Tanzania (2015) solar, and sea power enjoy reduced import taxes. Supplies imported or bought for the construction of power-generating plants, as well as certain equipment and machinery, are eligible for VAT and import duty exclusions under the VAT Act 2013 and VAT (Amendment) Act 2014: • Hydro turbines and water wheels are free from import duty but pay 16% VAT. Various documents • PV semi-conductor devices including PV cells Exemptions from from IEA/IRENA Kenya and light-emitting diodes, together with wind- import duty and VAT Policies and Measures powered generating sets (preassembled), are Database subject to a 5% import duty and 16% VAT. • Solar cells and modules that are not equipped with elements such as diodes, batteries, or similar equipment are free from import duty and exempt from VAT. • Wind engines (wind mills) are free from import duty and exempt from VAT. Investment in equipment (except for buildings) can Accelerated Syndicat des Industries Madagascar be depreciated at an accelerated rate of 30% of net depreciation de Madagascar (2015) value. 100 TRANSLATING RECOMMENDATIONS INTO POLICIES AND REGULATIONS Table 4.3 (continued) Examples of taxation laws and regulations that support mini-grid development Measure Country Law/act formulation / description Reference ‘Goods imported to be used in the process of conservation, generation or production of renewable or environment friendly energy sources, Amendment 3 to the as endorsed by the Seychelles Energy Commission 2010 regulations of the Exemption from goods Seychelles are exempt from Goods and Services Tax’. A similar Goods and Services Tax and services tax exemption for renewable energy technologies is Act of 2001 (Regulation offered in the 2010 ‘Promotion of Environment 163F) Friendly Energy Regulations’ under the Trades Tax Act. An arrangement has been made to refund VAT to Nepal financial small-hydro projects developed and operated by budget for the fiscal VAT refund Nepal community-based consumers committees that do year 2015–16 (Crowe not elect to take the zero rate on import tax. Horwath, 2015) Land rights and use. Private mini-grid companies complicated the process (and the more the process must acquire land for their generation assets and depends on obtaining still other regulatory permits distribution grid, bringing them into contact with and approvals), the more detrimental their effect on legislation governing the purchase, registration, and tariffs. Permitting processes should be simplified and use of land. Automatic rights of way along public streamlined. Exemption for building and construction streets for distribution and transmission grids, permits should not encourage one type of solution templates for contracts between mini-grid operators over another (e.g., locally built power house vs and private landowners, and clearance for foreign preassembled container). ownership of land (if foreign investment is targeted) Banking. Properly conceived banking regulations can speed project development and reduce its cost. have the power to incentivise national financial Incorporation and company formation. The institutions to lend to mini-grid projects. Advance legislation and regulations governing company preparation of risk assessments and campaigns to formation are an essential concern of private mini-grid provide background knowledge about the sector can companies. Unfortunately, in many developing countries, help. Including renewable energy projects among the sectors and projects that count towards the minimum establishing a business takes months and many separate portfolio obligations of financial institutions (or steps, including the acquisition of various licenses and priority sector lending), as in Nepal and India, would permits. For mini-grid business models that hinge on make more credit available to mini-grid operators and the creation of multiple special purpose vehicles, these end users of electricity. lengthy procedures can have a detrimental effect on tariffs. The right to repatriate profits must be granted if foreign investment is targeted. 4.4 IMPLEMENTATION OF POLICY The World Bank’s Doing Business project publishes RECOMMENDATIONS THROUGH an annual report that sets out the procedures for TERTIARY MEASURES establishing a private company in 189 economies Tertiary measures cannot be clearly attributed to and selected cities, including the cost and typical either energy ministries or any single other ministry. approval time for required permits and approvals. Some of these measures are discussed below, where Doing Business publications are available at: www. possible with country examples. doingbusiness.org/. Capacity building through technical assistance. Building and construction. Mini-grid operators International or development organisations can finance must obtain permits to build a power plant and independent capacity needs assessments at all levels grids for transmission and distribution. The more and provide necessary capacity building through 101 POLICIES AND REGULATIONS FOR PRIVATE SECTOR RENEWABLE ENERGY MINI-GRIDS technical assistance grants or concessional loans. ministry officials implement policies that enable mini- Capacity development can have a huge impact by grids to contribute to rural electrification. And it can increasing the ability of mini-grid developers to design help regulators understand mini-grids better and adopt and implement projects, undertake pilot projects, streamlined, light-handed regulation where appropriate. develop viable business models, and safely and effi- Broader information campaigns can improve the public’s ciently operate and maintain mini-grids. It can help understanding of the opportunities and limitations bankers understand mini-grids and how to conduct due of mini-grids. Table 4.4 provides some examples of diligence of mini-grid projects. It can help electricity capacity building initiatives in Uganda and Sri Lanka. Table 4.4 Selected examples of capacity building initiatives Measure Country Law/act formulation / description Reference Besides providing a variety of financing assistance, the Uganda Energy Credit Capitalisation Company Pre-investment barriers Uganda (UECCC) offers various forms of technical UECCC (n.d.) assistance to developers and financial institutions to address pre-investment barriers. Sri Lanka Lights Up: Renewable Energy for Rural Economic Development (RERED) assists communities and authorities with studies of micro- hydropower feasibility, income generation and the productive use of electricity, improved delivery Mini-grid development; Sri Lanka of social services based on access to electricity, World Bank (2012) productive end-use energy efficiency and load management, development of carbon-trading mechanisms, integration of renewables into government policy, provincial council development strategies, and sector reform initiatives. Statistics and data collection. Collecting, National policy makers and regulators can also aggregating, analysing, and publicising reliable data facilitate the financing of feasibility studies and pertinent to site selection can greatly facilitate project assessments of the availability of biomass, hydro, development for all types of mini-grids. Especially and wind resources, thereby reducing the time, cost, important are reliable numbers on inhabitants per and risk of project development for mini-grids. In town/village and their average income, locally Tanzania’s REA, GIS data on village locations and available renewable energy resources and existing and populations is superimposed on layers detailing the potential productive uses. Sources include the national existing electricity network. The resulting dataset census, GPS data on villages, and renewable resource is then made available to mini-grid developers to data. In addition to gathering the data, appropriate determine mini-grid priority areas. institutions should be responsible for storing the data, Efforts to develop and update centralised data sources processing it (including into GIS maps and carrying can be complemented by bottom-up approaches out the modelling analysis), and then using them involving diverse stakeholders at the local-level who for planning. These functions may be spread across are facilitated rather than directed. several entities. In Nigeria, data collection is handled by the National Bureau of Statistics, data management Synergies with other sectors. Identifying synergies by GIS centres, and planning by the ministry and with other sectors can help mini-grid projects achieve agencies responsible for electrification. greater end-user impact by creating a virtuous cycle 102 TRANSLATING RECOMMENDATIONS INTO POLICIES AND REGULATIONS powered by rising living standards, rising electricity This report analysed country experiences pertaining demand, and gradually falling tariffs. The sectors with to one element of an enabling environment for the highest potential synergies include agriculture, mini-grids: Policy and regulations. There are others, health, drinking water, sanitation, education, economic such as business models, financing and capacity development, and telecommunications. One way building, which were beyond the purview of this of facilitating the collaboration of actors in these report, but contribute immensely to the scale-up of synergistic sectors is to organise regular matchmaking mini-grids. Equally, the report focused on catalysing platforms—a recommendation that applies to all mini- private sector participation in the sector given re- grid technologies. For example, Sri Lanka’s RERED cent interest and developments. Traditional actors, program helps villages to develop productive uses including community groups, NGOs and develop- of mini-grid electricity, notably by using electricity ment agencies, have driven sector development for during off-peak daytime hours for income-producing decades and can provide immense insights into de- productive uses such as agricultural processing, small- veloping a sustainable model for mini-grid expansion. scale manufacturing, and handicraft production. Nepal Tapping into the wealth of experience of each of the provides a subsidy amounting to 30% of the total stakeholders, along with political commitment to put investment cost of energy conversion and processing in place enabling conditions, policy makers have an equipment (up to USD 1 000) for enterprises using immense opportunity at hand to reach electrification renewable energy in previously unelectrified areas. and development goals. Box 4.3 Harnessing the cross-sector development 4.5 CONCLUSION opportunity Renewable energy-based mini-grid solutions are well positioned to deliver a large proportion of genera-tion The forward linkages of electricity access for needed to reach universal access to electricity. Faced rural development are marked by considerable with high levels of electricity demand growth, they im-provements in productivity, income, and also represent an opportunity for many developing livelihoods, all of which produce further spill-over countries to expand the power system from the bottom- effects. As noted earlier in this report, renewable up and, in the process, stimulate rural economies. This energy solutions have the potential to advance leap-frogging opportunity resonates strongly with the at least 12 of the Sustainable Development Goals. ongoing global energy sector transformation driven The development impact of electricity access by accelerated growth of cost-effective, decentralised depends on how effectively rural communities are renewable energy solutions. Well-designed mini- able to harness the opportunities enabled through grid policies and regulations can support, and even modern energy. An integrated approach that accelerate, this transformation with tremendous socio- focuses on supply options as well as consumption economic benefits on offer (Box 4.4). would enable delivery of tailored technology, The policy and regulatory landscape for mini-grids is financing and capacity building solutions that a dynamic one as governments introduce dedicated maximise socio-economic im-pacts. Key sectors, measures, gain experience and incorporate learning such as agriculture, health and education, all towards a more effective framework for mini-grid benefit from access to modern ener-gy services, development. This policy development cycle is essential and the modularity of renewable energy for successful adaptation to local conditions and to technologies enables customisation for different address barriers to deployment that arise during different applications . All tend to gain from an integrated stages of market development. 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